suwailem's  Instablog

At near zero-interest rates, monetary policy has very few options to stimulate a depressed economy. With huge government debt, there is not much room for additional government debt-financed spending. With low business performance and consumer spending, there is not much room for higher income tax. Is there a way out?

The answer is yes, and it is very simple. A tax on "hoarded money". Hoarding, as is well known, is an endemic characteristic of a depressed economy. It is a coordination problem. If you expect others will not spend, you will abstain from spending. If they do the same, choices validate expectations, which make them persist even longer. Hoarding feeds upon itself.

Government spending partially helps, but does not push the economy out of this trap. Rather, it might validate agents' expectations, as the responsibility becomes that of the government, not everyone in the society. Private agents simply lend the money to the government, and bear no risk in the recovery process. They do not share the burden; in fact, they make money along the way through paid interest.

To break the viscous cycle of hoarding, there must be a leak in the feedback loop. The leak is a tax on hoarded money: e.g. an annual 1-5% gradually imposed tax on deposits and money market accounts of balances greater than, say, $200k. When hoarding becomes costly, it pays to spend and break away from the vicious circle.

This tax can be easily adjusted after recovery. In fact, as the economy starts its way out of the trap, reducing the tax will make recovery even quicker.

This idea is not new. Keynes in his General Theory mentioned the experiment by Silvio Gesell of taxing currency. Irving Fisher also embraced the idea. Recently, economist Mitsuhiro Fukao, among others, recommends a variant of it for Japan.

It is time for authorities to seriously consider this option.