Bankruptcy

How to Start to Get Trillions in Lost Wealth Back

By Christian E. Weller

The fact that wealth is rapidly declining deserves public policy attention. Wealth serves critical functions in the U.S. economy that relies heavily on individual initiative. It is primarily an insurance against a range of economic risks. The more such insurance exists for the typical family, the less a family has to worry about their basic necessities and the more they can focus on longer-term economic growth. A family that has the basics covered can take more chances by sending their kids to college and letting them choose a degree that suits their abilities. Also, family members can more easily switch jobs to match their particular skills. And, a family with enough wealth is in a better position to let their creative side take hold and start a business. The entire economy wins from letting people gain more skills and apply those skills most effectively in their job or by starting a business.

Recommending what the government should and should not do about rebuilding family wealth has become as ubiquitous as real estate ads in the mid-2000s and dot-com IPO discussions in the late 1990s. Here are just a few principles that will likely guide the reform debate.

First, savings incentives should be in the form of refundable tax credits instead of deductions. The government simply doesn?t know who will be good at building wealth and who won?t be. Savings should thus be encouraged through credits that are proportional to individual savings and do not depend on a family?s federal income tax liabilities.

Second, savings should be made easy. Behavioral economics has taught us that public policy can use people?s inherent inertia to build wealth, rather than impede wealth creation, as is currently the case. Automatic enrollment in workplace retirement savings vehicles, for instance, is a good way to encourage participation.

Third, shine a light on it. Comprehensive, concise, and comparable information on the costs and risks of different forms of wealth need to be available to all consumers. Presenting information on page 173 of a densely written legal document, where one part of the information is expressed in percent and the other in dollar terms, only obscures facts instead of creating informed consumers.

Fourth, do not play whack-a-mole. Harvard Professor Elizabeth Warren has long argued that financial regulation in the interest of consumer needs to be comprehensive to avoid chasing after the latest industry practices and financial innovations. Regulators thus need to have a comparatively broad scope with substantial discretion over the regulated industries.

Fifth, encourage more financial market competition. Much of the financial service industry today is an uneven playing field that is tilted against the consumer. What economists call ?monopolistic competition? ends up costing consumers billions of dollars in fees and interest, lack of access to stable and sustainable credit, and investments inappropriate to their needs. Financial market regulation needs to encourage the elimination of segmented markets ? payday loans for military families, subprime loans for minorities, car title loans for low-income earners ? to promote access to more affordable credit and investments.

Sixth, fill persistent credit market holes. For a variety of reasons, some credit markets do not exist or exist only with large costs. It is often argued that this applies to sustainable markets for mortgage securitization, affordable student loans, and stable small business financing, among others. In order for private lenders to eventually fill these gaps, public policy must first clearly identify persistent gaps, consider the tools to address these problems, and find ways to unwind the public?s commitment to these markets.

Full post as published by Credit Slips on March 22, 2009 (boomark / email).