subscribe to the RSS Feed

Friday, June 23, 2017

If the economy were like one household

Posted by steve on December 7, 2010

We could see the national economy as one household. In this household everyone gets fed, and the money coming in  covers the bills. Simple.

But not really. Following the first great financial crisis of this millennium, many nations are struggling with high unemployment, soaring budget deficits and crippling debt servicing costs. The temptation arises to introduce economic austerity measures and shock therapies. However, these measures reduce demand, reduce investments, reduce production and increase unemployment. These measures are unproductive, destructive and unfair. And poor people – the ones who have the least blame for the crisis – become losers and suffer.

That is a bit like making some of the family members suffer for the excesses of a few rich ones. I does just not sound right.
Actually if we, from our macroeconomic vantage look at who owes money to whom, we will see that all domestic financial debts are, by definition, also domestic financial assets.

The money is owed within the family. Using the household expenses picture, we could say that the bills are covered by the money coming in.

So no matter how large the public debt, it does not automatically mean that the country or that population as a whole is poor. An extreme example; Japan is a rich country and the Japanese are a rich people (On average) despite Japanese public debt per capita being the largest in the world. The Japanese public debt is simply owed to (albeit rich) people in Japan.

So what possibilities are there to stabilize recovery? Well, we live in the information age. Most transactions are now digital. We can get masses of information, in almost real time, about how the economy is performing. And we can inform whole nations quickly – governments can explain and introduce measures and fees and prices can be made flexible.

We can steer the economy with almost the same speed a family can gather to share and  redistribute money to balance the household budget.
The London congestion charge gives one small example of introducing a measure along with a flexible fee.
Most of the globe is working with a market economy. If a sound enough incentive structure can appear in the economy – an incentive harmonizing private good and long term public good – and at the same time externalities are internalized in the market, then, by definition, market forces will automatically work to solve the problems.

Could this approach work for the real estate market?
This market is vital as it serves as the underlying security of the financial system. A real estate bubble collapse is often accompanied by serious and sometimes dangerous financial disturbances affecting the whole economy.
Returning real estate prices to pre-crisis value would do much to strengthen the economy.
So what instruments and medicines could we apply? How could we stimulate demand, and growth in prices?
We could introduce a house purchase subsidy. (Not unlike the new car subsidies in US and Germany or the eco-car subsidies in Sweden). And we could make it flexible.
Every house purchase would receive a subsidy as a percentage of the purchase price of the house. T he subsidy would come out of a real estate market control fund when the deed had been properly registered.
Money for the fund comes from a percentage fee on the sale of property. This is how it could work: Publicly announce that the purpose of the subsidy and the market control fund is to restore the value of the stock of real estate to the value it had before the collapse and then to secure its value to safeguard the securities in the financial system.
Adjust the subsidy sufficiently often, the amount of adjustment depending on the rising or falling of prices in relation to the publicly announced target. If prices rise higher and faster than intended, the subsidy could become negative. Then, by definition, the buyer will pay a buying fee to the fund as the seller receives a selling subsidy. If done frequently enough, a control subsidy futures market will emerge spontaneously as a means to reduce risk exposure.
And with house prices stabilized and under control, we have set the conditions for a stabilization of aggregate demand, which stabilizes employment.

Even aggregate demand could be stimulated with a consumption flexible subsidy.
Financed by a flat income tax, the subsidy would be highest at the point where aggregate demand has fallen off. Monitoring the average wage index and the consumer price index closely and adjusting the subsidy regularly and sufficiently often, a consumption control subsidy futures market will emerge spontaneously.

Read more abut flexible fees in my white paper on the subject.

Leave a comment, and if you'd like your own picture to show up next to your comments, go get a gravatar!

home | top