Avoiding a Lost Decade

by: CERF

Finally, people are starting to see the problem with the United States economy. This piece is typical. For over a year now, we have been warning that the United States could be facing a long period of slow economic growth, similar to what Japan has seen for the past couple of decades.

Seeing a problem and knowing how to solve it are two different things. So, we’re going to see lots of silly ideas proposed. We’ll see demands for more government spending. We’ll see demands for less government spending. We’ll see demands for higher taxes. We’ll see demands for lower taxes. We’ll see demands for more consumer spending. We’ll see demands for more consumer saving.

All of these recommendations can’t be correct. In fact, they are all beside the point. I’m not saying the proposals won’t have any impact. They will, but the impacts will either be marginal or they will be some time in the future. Our problem is immediate and very serious. Here’s what we need to do to avoid a lost decade:

  • Fix the financial sector
  • Stop paying interest on deposits at the Fed
  • Lower effective borrowing costs with an investment tax credit
  • Reduce regulatory uncertainty and big-business bias
  • Increase immigration

Any vigorous recovery needs a vigorous financial sector, and ours is not. Fed policy has been ineffective, because the money multiplier has tanked, even as the monetary base soared. There are two reasons for this: The Fed is paying banks to deposit at the Fed, and the banks–burdened with over-leveraged balance sheets, huge charge-offs, and bad assets–are in no shape to lend. Fix the banks, and stop encouraging them to park money in Washington, and we’ll have a start on real recovery.

We have an investment problem; there isn’t any. That’s because, even at zero, borrowing costs exceed expected returns on investments, and the future regulatory environment is extremely uncertain. We can’t lower interest rates below zero, but an investment tax credit would effectively lower borrowing costs. Do that and remove regulatory uncertainty, and our businesses will invest. While we’re at it, let’s reduce big business’ regulatory advantage.

Finally, we don’t have any problems that couldn’t be fixed by a few million new immigrants. We’d see an immediate increase in housing demand and construction. Our inner cities would be renewed. Our economy would see a burst of creativity, energy, and new business formation.