Consulting the Learned Elite on Fixing the Economy

Dear Mr. President

Newsweek has a great article on “fixing the economy” that includes the letters of seven Nobel Prize winners in Economic Sciences to the next president. I’ve summarized them below and offered my own analysis for your reading pleasure.

Paul Krugman

1. The administration and Congress must put forward a major fiscal-stimulus plan:

This time centered on spending rather than tax cuts—aid to stressed state and local governments, expanded and extended unemployment benefits, and some serious public-works spending. The goal is to do well while doing good—to provide much needed help to individuals and help repair our frayed infrastructure, while at the same time supporting demand and employment.

2. The administration and Congress must expand regulation of financial institutions:

If financial institutions need to be rescued like banks, they need to be regulated like banks, with the key things being capital requirements and oversight.

3. Now is the time for healthcare reform:

The economic crisis has driven home the insecurity created by our current system, under which the misery of Americans who lose their jobs is often compounded by the loss of health insurance, as well.

Michael Spense

1. Top priority is to have a strong treasury department as well as Secretary that is experienced in the financial sector.

2. Continue to inject capital into the financial system.

3. Return to the mortages and reset terms and avoid a flood of foreclosures for “for efficiency, equity and political reasons”.

4. Inject fiscal-stimulus while focusing on bringing the national defecit to sustainable levels.

5. Coordinate policies with other major economies to avoid “unintended and unwanted volatility in capital flows searching for the safest haven”.

6. Structure ownership and control of financial sector “in such a way as to make it possible for private capital to reenter as the [industry's] damaged balance sheets get better and the visibility/transparency improves”.

7. Post-crisis, it must be able to look back and analyze the systemic failures in order to better implement new policies for the future.

Joseph E. Stiglitz

1. More investments in infrastructure and technology.

Green investments on alternative-energy sources and public-transport systems can help wean us off our oil dependence.

2. In order to make more investments, we must raise taxes at least on upper-income Americans, and use those resources wisely. W must eliminate inefficiencies in military spending, and spend more in healthcare for the health of our society and our economy.

Edward C. Prescott

Things NOT to do:

1. Create high tax rates that will kill incentives for economic growth.
2. Create more regulations, price controls, and too much government oversight that will lead to inefficiencies.
3. Equating the crisis with another onset of the Great Depression.
4. The American public putting too many expectations on the President to manage their business when we should be expecting him to manage the rules.

Eric Maskin

1. Distinguish between markets that do call for government intervention and those that don’t.

2. Couple a contingent bail-out policy with regulations about what banks can and cannot do.

If banks anticipate government will come to the rescue should the credit market go badly awry, they may make loans that would otherwise be imprudent, e.g. subprime loans with little prospect of repayment.

3. Understand that a well-planned activist government role is vitally important to the credit market.

Edmund Phelps

1. The President should press Congress to legislate that “the proposed base pay of CEOs be submitted to a shareholder vote and that bonuses be geared to long-term performance”.

2. Though the next president cannot legislate “strategic vision”, “financial players, instead of communicating and analyzing in terms of a single future, could be required to work with two or three future hypotheticals that include best- and worst-case scenarios”.

3. The next President should press Congress to “provide businesses with additional subsidies to help them invest, comparable to the subsidies it provides households—through Fanny Mae and Freddie Mac—to buy homes”.

4. Stimulate jobs for the disadvanted:

This will require a restructuring of the financial sector to serve business innovation. The tiny band of “angel investors” and venture capitalists can’t do it all…I have long advocated that a subsidy be paid to each firm employing low-wage workers as a way of raising their pay and stimulating their employment.

Sir Clive W.J. Granger

1. Emulate the British plan proposed by Prime Minister Gordon Brown:

The cost is less than previous schemes and is designed to be reversible in four or five years if successful. The money is going exactly where it is most needed! Should the Brown plan be widely accepted and acted on, we will still all face a few weeks or possibly even months of uncertainty before the world’s economies get back on a sound trajectory.

2. Keep watch over the cost of government spending and heavily publicize them.

It would be less than continuing the Iraq war for a few years and much less than going to war with Iran, which is so casually debated.

3. Place funds directly into banks.

4. The new President should concentrate on getting workers back to work once the credit markets are working well.

Conclusions

Prescott I think still believes in “laissez-faire” economics, which seems a bit out of touch with what’s going on. However, having a voice which cautions against regulation is always a good idea to make sure regulation doesn’t go too far.

Granger is vague and a bit unhelpful. I actually laughed at his letter. What’s the solution to the financial crisis again? “Be British.” Aaaannnd? “Put money in the banks.” Ok, well what if that doesn’t work? “Do something else.” Thanks for the insight.

I took the courtesy of bolding a statement about investing in green technology, because I firmly believe it will have a positive effect on the economy period. But overall, I’d say the biggest thing I got out of all these opinions is that there SHOULD NOT be a decrease or even a “freeze”, as McCain has suggested in the debates. Efficient government spending in infrastructure, especially healthcare, will go a long way.

I omitted any reference the laureates made to who the best man for the job would be, or at least who they think is going to win. After reading all that, I think its clear that McCain’s proposed policies would not work. McCain is a courageous individual who is committed to serving the American people, but I think his ability to do so is impeded by his apparent inability to understand the financial crisis. However, it is my sincere hope that he will be involved in fixing the economy even if he does not win the election because I think he is a valuable player.