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.”