It would be tragic if, again, policymakers missed the forest (the need for growth) for the trees (keeping asset prices supported).
Critical thinking is often constrained by assumptions like “The politicians will never agree to this”, or “We don’t have enough capital to think of expansion”, or “We will never be able to convince everybody to give up plastic”, or whatever. While there are always constraints in life, if we build these constraints into our problem definition (as all too frequently happens, often implicitly), we end up losing focus on—and, as a result, misdiagnosing—the problem.
A case in point is the behaviour of successive US Fed governors since the 1980s, increasingly so over the past two decades. Whenever there is a crisis, the first—almost knee-jerk—response is to prevent equity markets from collapsing, without any thought as to whether asset prices are appropriate or, indeed, whether it is good to have constantly rising asset prices. Alan Greenspan, to his credit, did note in 1996 that equities appeared to be behaving with “irrational exuberance” when the Dow had risen to over 6,000, but he lost all his marks for continuing to pump up the volume till the market rose nearly 100% over the next five years, ending in the dot-com crash. More recently, the Fed (and, to be sure, other central banks) cut rates towards—and finally, in some cases, below—zero to help markets recover from the 2008-09 crisis, and currently after the coronavirus epidemic.
Implicit in all this action is the belief that a strong equity market is good for the economy, missing the fact that the equity market is—or should be—simply a reflection of the real economy, and the job of policymakers is—or should be—to find ways to build up the real economy.
The only meaningful measure of the real economy is growth, and the only way to get growth is to put money in the hands of the consumers who will save some part and spend the rest, the ratio depending largely on sentiment. Companies will invest only when they see demand, and sound equity markets will (or should) rise only when companies are able to generate strong profits.
The best way to put money in the hands of people is to (a) institute a minimum basic income for people at the lowest end of the spectrum (certainly in countries like India), and (b) eliminate all taxes, direct and indirect, in the hands of individuals. To enable companies to invest to meet the demand from people, there should be zero corporate taxes as well—this will enable companies to pay better wages/salaries at all levels. Another way to increase the money-in-hand of people at the lower end of employment is to cap the zero tax on individual salaries to, say 200 times the minimum salary in the company. Thus, if the lowest-paid employee made `2 lakh a year, the CEO could only make `4 crore a year tax-free; if the CEO wanted/needed a higher salary, salaries would go up all through the company. While this would increase costs, it would be balanced by the fact that there is zero tax on profits.
This approach would ensure the strongest possible growth and, incidentally, would work to bring the lowest end of the economic spectrum closer to the centre. Further, this real growth would generate inflation, which would lead to rising interest rates, which would be good for savers, particularly retired people.
Of course, there would continue (in countries like India, have) to be additional government expenditure on sustaining (building) a reasonable safety net, including unemployment insurance, health security, etc.
Since there would be zero inflow from income/corporate/indirect taxes, the government would be funded by reasonable taxation of assets. I note that historically this was a well-accepted practise—as recently as 1981 in the US, dividends were taxed at 75%; it is only since then, after Ronald Reagan started the giveaway of the economy to monied interests that taxation of assets declined sharply; sustained growth disappeared; and asset prices exploded to incomprehensible levels, leaving most people far removed from the honeypot. Income and asset inequality widened steadily, leading to political dissatisfaction and, amongst other things, Donald Trump.
In the market, trillions of dollars are now invested in zero- or negative-yielding government bonds, and investors are being forced to take on more and more risks to make any kind of return. The situation is unstable, to say the least, and—back to the pavilion—there is still no growth.
While analysts and policymakers are beginning to turn their minds on how governments should pay for the huge deficits engendered by the support needed because of the coronavirus epidemic, it would be tragic if, again, they missed the forest (the need for growth) for the trees (keeping asset prices supported).
The author is CEO, Mecklai Financial. Views are personal