A Couple of Quick Economic Fixes

With Donald Trump’s ascension to the throne taking of the oath of office imminent, I thought there were a few quick economic fixes that the upcoming Trump administration might be open to that the outgoing Obama administration never would have been.

Stop paying interest on bank reserves

The Fed should reduce or eliminate the interest rate it pays on the roughly $2.5 trillion of banks’ excess reserves. There may have been some good economic theories prior to the financial crisis as to why we should pay banks to not lend money, however the practical effect of that is that banks have far less incentive to loan out money than it did.  So no surprise, it’s now harder to secure business loans.  From the banks point of view, it’s a win/win.  They either don’t loan out money for a small interest rate, or loan the money out for a larger interest rate. If the practice of paying interest by the FED on excess interest vanished, banks would keep less cash on deposit at the Fed. The liberated funds would probably flow mainly into the money markets, but some would probably find their way into increased lending—which would give the economy a little boost.

Restore the Taylor Rule

In 2013 Carnegie Mellon Professor Allan Meltzer testified at a Congressional hearing that in its “100-year life the Fed has produced “only two multi-year periods [1923-1928 and 1985-2002] during which inflation was low, real income and employment fluctuations were modest and recessions were mild.” The common denominator in those two periods was a monetary rule, first the “gold-exchange standard” and later “the Taylor rule.””

Well there is little chance that we’re going back to the gold standard, but the Taylor Rule is much more likely. The Taylor rule states that, “for each one-percent increase in inflation, the central bank tends to raise the nominal interest rate by more than one percentage point.” Locking in a rule like that again, might provide a little bit more stability to both the markets and the banking system.

Corporations repatriate overseas funds via tax free loans to the government

One of the Trump economic plans to bring home overseas profits from US corporations involve allowing US companies to repatriate profits back to the US by paying just a flat 10% or tax instead of the usual 35% US corporate tax rate. That’s not a bad idea, but there is another way to skin that same cat that also works into financing another Trump idea, the 1 Trillion dollar infrastructure proposal.

Instead of charging the 10% fee on returning corporate profits, let the companies offer the government long-term, no-interest financing in lieu of cash. Although an interest free loan to the government benefits more than just financing infrastructure, if you are going to spend money for infrastructure, doing it with no interest loans is not a bad way to do it.

Switch emphasis of Small business administration to new businesses

Economic research has shown that small businesses, just by virtue of being small businesses, don’t add to job growth, new businesses do. New businesses account for 3% US employment but 20% of new jobs.  So it seems that should be encouraged. Switching the mandate and focus of the Small Business Administration to focus on new companies (the type that are more likely to generate innovation) seems a better bet if you want to generate jobs than just keeping small businesses small.

Granted, these are all small scale ideas, but a good economic environment is made up of a lot of factors, some big, some small. The more little tweaks that are made to the overall economic environment of the country, the better.