April 12 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
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)