Asked to offer a short-term idea for improving the economy, Bruce Bartlett hits upon the interest on reserves issue: “One idea would be to emulate Sweden and tax excess reserves rather than subsidizing them as the Fed now does by paying banks 0.25% per year on money that is not lent.”
It’s an open question in my mind how much of a difference this would make, but the direction seems obvious. Paying interest on excess reserves is a novel policy concept and a contractionary one. We should turn it in the other direction.
Meanwhile, this is probably just wishful thinking, but is it totally insane to think that with Republicans picking up tons of governor’s mansions and state legislative houses, that conservatives will start to realize that having continued waves of state and local budget crises is not in the national interest? I know a lot of conservative politicians at least claim to welcome the opportunity posed by a crisis to start slashing state budgets. But historically the actual practice of politicians at the state and local level has been to welcome the opportunity to forestall difficult choices. And the United States Congress can, by appropriating additional state
and local fiscal aid, facilitate the postponement of difficult choices. And in macroeconomic terms, this is a terrible moment for state governments to be making tough choices. Tax hikes, hidden tax hikes, service reductions, furloughs, and layoffs all make it much more difficult for the private sector to rebound.