Cutting taxes on business investment is an effective form of economic stimulus that could go a long way toward mending the damage from the financial crisis and Great Recession, a top Federal Reserve official said on Saturday.
In prepared remarks that did not touch on monetary policy, Minneapolis Federal Reserve Bank President Narayana Kocherlakota told a National Bureau of Economic Research conference that even apparently permanent damage to the economy can be reversed if policymakers are willing to take appropriate steps.
The U.S. economy was hit hard by the 2007-2009 financial crisis and the ensuing recession, with output last year 13 percent below where it had been before the crisis.
Although high unemployment has received the most policy attention, spurring unprecedented amounts of monetary accommodation from the U.S. central bank, the biggest drag on growth has actually been a decline in business capital, according to research presented at the conference by Stanford University professor Robert Hall.
If that shortfall can be reversed, Hall's research suggested, a large part of the damage from the crisis can be undone.
Kocherlakota, in his discussion of the paper, agreed.
"The future course of the U.S. economy is not predetermined by the events of the past seven years," Kocherlakota said at the meeting, which was closed to the press.
A copy of his prepared remarks was released by the bank.
As long as policymakers are willing to make tradeoffs, including accepting a drop in consumer spending, they can use a reduction in the tax rate on physical investments to effectively reverse the decline in business investment and boost overall economic growth.
"It is possible to undo what might now appear to be permanent changes. The question is not whether such reversals are possible," he said. "The question is whether they are, in fact, socially desirable in light of the associated losses" in leisure and consumption for Americans.
Kocherlakota, who has argued strongly for more monetary policy easing to boost the economy in other venues but did not touch on that policy option in his prepared remarks Saturday, said he did not have an answer to that question.
That, he said, is "a social choice problem that can only be resolved through a collective decision by Americans."
(Reporting by Ann Saphir; Editing by James Dalgleish)