For somebody who I suspect would dearly like to be Treasury Secretary in a future Republican administration, this strikes me as brave. Nice to see. I am grateful:
The false choice of stimulus versus austerity: The economic policy debate in Washington has come down to a boxing match between two opposing remedies – ‘stimulus’ in one corner and ‘austerity’ in the other. Unfortunately, considering each so-called solution in isolation has hampered both analysis and decision-making….
There are three tangible steps to boost growth. First, fundamental tax reform is essential. The US must reduce marginal tax rates on household and business earnings and on savings and investment, while broadening the tax base….
Second, a viable plan for medium and long-term fiscal consolidation is needed. The most straightforward would be a gradual slowing in the rate of growth of benefits in the Social Security and Medicare programmes…. The shift could be gradual, but if credible, would generate significant positive effects today.
Third, financial frictions make it difficult for households and businesses to respond positively to fiscal stimulus or to low interest rates. Policy actions need to mitigate this broken link in the chain. In particular, frictions in the mortgage market and low equity levels have restricted the ability of tens of millions of borrowers to take advantage of very low interest rates by refinancing their mortgages…. Household balance sheet repair would be accelerated if every homeowner with a mortgage through Fannie Mae and Freddie Mac who is current on payments were allowed to refinance their mortgage at the current very low rates…. Focusing just on monetary stimulus and temporary tax cuts misses these important links. The positive effects of low interest rates on refinancing, household incomes and wealth have been cancelled out by mortgage market imperfections that can be straightforwardly fixed. Additional fiscal stimulus for business investment can mimic very low interest rates in the cost of capital….
The proposed plan does not imply that short-term action by the government or the Federal Reserve is useless, but it should be consistent with the steps.