Tuesday, February 17, 2009

Sixteen Directives for Economic Recovery Policy Design

What I'll say here is not new, just read what many sensible economists have been writing about, as reported in some of my previous posts. I believe however that it may be helpful to write down a list of directives that could be used by the government to guide economic recovery policy design, directives that are clear and easy to follow.

The directives try to respect two basic principles of economics: (1) "incentives matter," and (2) "there's no such thing as a free lunch." They also try to not introduce institutional reforms of any kind, after all the government has yet too much trouble on its hands as it is.

The list is not supposed to be exhaustive or perfect by any measure, nonetheless I'm sure that a government program based on these directives would lead to a much more prompt economic recovery without overburdening future generations or creating permanent negative economic effects. Here's the list:
  1. No government action will lack transparency or imply privileges of any kind.
  2. The government will maintain its role as an impartial referee, enforcing the rules of the game and never participating as one of the players.
  3. No shareholder or CEO will be bailed out. Recapitalization of firms will only happen if strictly necessary to avoid systemic failure, and only after all original equity has been wiped out, according to bankruptcy principles.
  4. The government will partially or totally recover the cost of recapitalization by auctioning equity of recapitalized firms. No equity of recapitalized firms will remain on the hands of the government.
  5. The government will not be allowed to have executive powers in recapitalized firms.
  6. The government will facilitate the administrative handling of bankruptcy proceedings if necessary, respecting however preexisting contracts.
  7. The Fed will maintain the goal of keeping inflation low, however with more emphasis on financial stability, even if it comes at the cost of some short-term economic growth or interest rate stability.
  8. The Fed will formally commit itself to avoid deflation at all costs.
  9. No new government program will be funded. Current government programs that are at risk and are considered essential will be funded if necessary at the cost of increased budget deficits. Their funding will nonetheless obey to standard budgetary priorities and procedures.
  10. Fiscal stimulus will operate mostly through permanent or temporary tax cuts that promote consumption and investment.
  11. The government will not create obstacles to firms and households that wish to reduce their levels of indebtedness and will not suggest that they should do otherwise.
  12. Reduction of indebtedness will not be done through contractual breaches and rewrites or through excessive inflation.
  13. Negative income tax benefits or lump-sum transfers will be used as the primary tools to help the poor and unemployed. Terms and benefits of unemployment insurance will not be extended or improved to avoid long-term negative consequences to employment.
  14. No government action will empower worker or industry unions of any kind.
  15. No government action will serve as obstacle to free trade.
  16. No government officer will suggest that the world will end and the mountains will crumble to the sea, no matter how tempting it may be to do it.

If judged by the sixteen directives above, government actions until now have left much to be desired. In reality, most of what the government has been doing is in direct conflict with these directives.

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