Krazy Keynesian Wants Shopping Subsidies
The key is realising that recessions are usually consumer cycles, not business cycles. They're driven by weakening demand first for homes, then for consumer durables, and finally for non-durables and services. As consumers stop spending, businesses stop investing, and the economy "recedes".
It was a surreal moment listening to Laurence Kotlikoff, a Professor of Economics at Boston University, on Bloomberg radio last week as he discussed his plan for curbing savings and triggering spending. This is a recent column of his (along with a co-writer) from the Financial Times that discusses his plans for a Keynesian salvation for America.
He invokes Keynes' Paradox of Thrift and says that evil consumers are hoarding every dollar as if it's their last. He says that these "collective and obsessive attempts to save" (the "panicked-saving trap") are undermining the economy. Kotlikoff is horrified that a large percentage of the stimulus monies received by taxpayers were saved. In fact, he says tax cuts are not a good thing because they result in savings, which doesn't necessarily translate into spending money. He thinks that distributing debit cards to people is an option, but he says that won't work quickly enough. (Never mind the fact that enterprising savers who would rather have cash than shopping privileges could sell their debit cards at discounts to high time preference people who plan to use them to buy.) So, what is his plan? Uncle Sam's National Sale.
Here's how it would work. Uncle Sam would pay each state a fixed percentage - say 5 per cent - of the 2007 consumption of its residents. States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they'll receive from Uncle Sam.
For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, ie subsidising purchases. Shoppers would see a negative tax on their sales receipts, lowering their outlays. State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.
States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems. To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.
Finally, he says his plan will give us "economic medicine where it's most needed - on consumer spending, giving everyone an incentive to spend now and begin again to trust our economy and its institutions."
Comments (11)
Yancey Ward
It is funny how all these "economists" dance around the edges of the simplest implementation of their stimulus plan. Just mail every citizen a check for $5000, $10000, or $25000. That way we can settle this debate once and for all time.
Published: November 17, 2008 7:42 PM
Steve Hogan
If Dr. Kotlikoff persists in peddling absurdities such as subsidized shopping, he'll be in jeopardy of receiving next year's Nobel prize for economics.
Published: November 17, 2008 7:53 PM
drew
ugh. how many times must we go through this keynesian rigmarole? of course inflationary policy is going to make it look like we're experiencing economic growth, but it's all smoke and mirrors. fake money fuels fake demand causing businesses to overproduce.
what's so hard to understand about the fact that if you're broke in your own household, you don't go out and rack up the credit card bills. just because you look rich doesn't mean you are rich. what works for a household also works for a nation.
Published: November 17, 2008 7:59 PM
Frank
"Just mail every citizen a check for $5000, $10000, or $25000. That way we can settle this debate once and for all time."
Better yet, why not completely eliminate payroll taxes? I'm a substitute teacher and 30% of my meager checks are gone before I even have my hands on it. I could spend/save that extra money instead of it being redistributed to me.
Published: November 17, 2008 9:53 PM
Justin
What this guy is failing to realize is that consumer cycles are only apparent because of the government's control on the money supply. Its obvious that people will consume more when they have an easier line of credit. Let there be sound money and market controlled interest and there will be no consumer cycles. It seems to me as though all economists are stuck in this idea that macroeconomic phenomena are caused by the natural economy rather than by our government's intervention in an increasing number of industries.
The worst part of this guy's ideas are the extra powers such a proposal would give to the overall state. With his proposal, we would further diminish liberty in industry by forcing all firms at market to make further concessions to the state's regulatory system. Furthermore, his plan for making such a system more progressive is even more worrisome. With government in control of prices for individual goods, and with their hand in each and every firm, how far off are we from giving them the power to deny certain individuals the right to freely participate in the market?
Published: November 17, 2008 11:06 PM
David
It's funny (and sad), but when I saw this post title I thought it was in reference to another similar demand for stimulus I saw just the the other day.
It seems the CEO of JC Penney thinks that consumers are not spending enough in the wake of this current recession, and he wants the new administration to do something about it. Quote:
“Obviously, consumer confidence has plummeted,” Mike Ullman, chief executive of JC Penney, told Wall Street analysts. “I think [for] the new administration, it is job one for them to try to understand how to get the consumer back in the game.”
http://www.ft.com/cms/s/0/cea9e032-b251-11dd-bbc9-0000779fd18c.html
Published: November 17, 2008 11:21 PM
Miklos Hollender
I'm just puzzled by what's going on in the world of economics in the last few months.
AFAIK Keynesianism was thoroughly beaten by a "pincer movement" of the two marginalist schools: Austrians attacked from the viewpoint of the general theory while Neoclassicals analyized the empirical results of many Keynesian policies. AFAIK no self-respecting person was thoroughly Keynesian after 1978 or so.
Now it's back with full force - but the point is that they say nothing about the old criticisms. They just dismiss ABCT and all they have to say about Neoclassical theory is nothing more than "36 years of Reagonomics brought this crisis", which is a poor criticism as best. The strategy seems to be to ignore or dismiss whatever Austrians or Neoclassicals have asserted, and then just assume that if the assertions are seen as irrelevant then their criticisms against Keynesianism are irrelevant either, just because. I'm really puzzled, I've never seen such logic, it's like person A asserts eating zinc is good for you, person B asserts eating zinc is bad for this reason, and you should rather eat iron for that reason. And then person A says eating iron is bad for that third reason, THEREFORE your criticism against eating zinc is wrong either. WTF? Is it really what's going on?
Published: November 18, 2008 3:26 AM
Enjoy Every Sandwich
I've got bad news for the good professor. If this scheme is put into effect, I won't buy more stuff. I will buy the same amount of stuff; the money I save via the lowered sales tax I will....bwuhahahaha! SAVE!
Published: November 18, 2008 7:38 AM
David LaFerney
I keep hearing that our (We the People) most important economic roll is that of consumer.
However it seems to me that the more correct statement would be that our roll as wanton consumers props up a huge segment of the economy which has thrived on selling us (marketing, manufacturing, financing) crap that we don't need and can't afford.
Unfortunately many of our jobs are now rooted in that segment.
Published: November 18, 2008 8:20 AM
newson
this is a plea to the good folk @ mises.org
in order to combat this keynesian disease, it's necessary to take issue with the gdp construct, and the way it over-emphasizes consumption, to the detriment of production.
professor reisman deserves credit for his articles on this very point, but i'd like a lot more work on how kuznets came up with the measure.
after all, it must be bad if the bea calls it:
"GDP: One of the Great Inventions of the 20th Century"
Published: November 18, 2008 8:39 AM
Glen
Why won't the Keynesian disease go away? All non-Keynesian (esp. Austrian) ways to "fix" the economic situation have to do with directly or indirectly reducing government power. It is usually easy to show the economy is doing how the central powers want it to look or blame the private sector for adjusting to the interventionist policies. Since most of us only think in terms of how we are doing NOW, give me enough money to pay for what I want, and I'll believe that the economy is "fixed". When the day of reckoning is finally reached, I'll probably blame the current guy and even then, the current guy may be silver tongued enough to lay off the blame from government to the market.
Published: November 18, 2008 2:29 PM