Bright ideas

The moribund U.S. economy is behaving like a shiftless brother-in-law who moves into your house, flops onto the couch, and asks what’s for supper. Getting such an economy moving productively again will require time, discipline, and imagination, say Harvard authorities from across a range of disciplines.

Successfully stoking the economy will require conventional solutions, to be sure, such as Congress’s recent passage of banking and investment reforms. But three years into the worst fiscal downturn since 1929, the economy continues to sputter, and it may be time to embrace more creative solutions as well.

Recognizing the need to understand the financial crisis more clearly, Harvard President Drew Faust will convene a panel of experts at Sanders Theatre next Tuesday (Oct. 12) at 4 p.m. to discuss the issue.

“The global financial situation and our economic future remain vital concerns for all of us,” said Faust.  “We are fortunate to have on campus some of the nation’s leading scholars in finance and policy, and I am grateful for their willingness to share their thoughts and insights about the current situation and prospects for the future.”

Despite the ongoing fiscal gloom nationally, a Gazette survey of Harvard authorities suggests an array of large and small ways in which government and business might help to jump-start the economy and boost America’s bottom line.

Their innovative proposals include:

• Rewrite the U.S. tax code, creating a single income tax and a carbon tax.
• Create a national homebuyers’ insurance plan to protect owners during fiscal turmoil.
• Underwrite a boom in green businesses to conserve energy and create jobs, for two-pronged savings.
• Investigate how Internet innovations, a hot spot even in a bad economy, can provide business solutions.
• Refashion the notion of urban design so that it twins both enjoyment and employment.
• Explore the downturn’s moral dimensions to evaluate what really matters in a fulfilling life.

Here are details of changes that could make a difference:

Taxes

Taxes need to go up for everyone, argues Harvard economist Ken Rogoff. He supports a slight increase in taxes for most people, and a larger increase for those at the upper end of the income distribution.

But if he had his way, the Thomas D. Cabot Professor of Public Policy would throw out the U.S. tax system altogether and start from scratch.

In the short term, it will hurt the economy to raise taxes, “but a lot of that pain could be diminished if we had a better tax system,” said Rogoff, co-author of “This Time Is Different: Eight Centuries of Financial Folly.” He favors “completely scrapping” the system and replacing it with one that is “much simpler” that includes a consumption tax or a high-deductible flat tax.

Government officials also should tie environmental needs into economic solutions, said Rogoff. “It’s nuts that we don’t have a carbon tax,” he said. “If we did, we could cut other taxes. It would also promote green energy technologies by making fossil-based energy more expensive.”

Housing

The housing market continues to lag. One way to get it moving again would be to install an innovative safeguard against the next market downturn. Another way would be to create a green approach toward housing stock, said a Harvard housing specialist.

“Some people argue the only way to deal with the housing market is to allow it to clear through continuing declines in home prices despite the damage it could do and the resulting overcorrection that could occur,” said Eric Belsky, managing director of Harvard’s Joint Center for Housing Studies. But there’s another solution that’s been “kicking around.”

“People who worry about being on the hook for a decline [in value] might well pay insurance premiums that would guarantee them against declines in the value of their homes,” said Belsky, who said such a plan could draw more buyers into the market as well as increase price stability. If homeowners had to sell their houses in five or 10 years at prices lower than what they originally paid, the insurance would kick in.

Although the government would have to set a premium to backstop potential losses, “A lot of people think that house prices five or 10 years out would recover, so it might actually be a good bet for the government.”

Providing incentives for people to buy energy-efficient homes, as well as to builders to include energy-saving measures in their construction, would “trigger spending on materials and services to install them, as well as induce buyers to purchase such homes,” said Belsky. “In that way, housing could have a significant part in helping to build the new economy.”

Internet

For years, the Internet has radically and speedily been changing the way people work, connecting them remotely, instantly, even incessantly. A Harvard authority on the Internet believes that new online technologies are going to change the way many people work even further, tapping into a range of fresh economic opportunities.

“We are on the threshold of something transformative,” said Jonathan Zittrain, co-founder and faculty co-director of the Berkman Center for Internet & Society at Harvard Law School.

The Harvard law professor points to Amazon.com’s Mechanical Turk web service as an example. Touted as an “artificial artificial intelligence” on its website, the online tool “gives businesses and developers access to an on-demand, scalable work force. Workers select from thousands of tasks and work whenever it’s convenient,” its tagline states.

The business model matches people who are willing to pay with anyone willing to complete human-intelligence tasks, or HITs, for a micropayment. The tasks vary wildly, from providing a book review, to sharing the memory of your least-romantic gift, to translating Tamil into English. The tasks are ones that humans can do with relative ease, but that still challenge computers.

“It’s a model itself of labor as computing, as if you had a few racks of servers and kept throwing numbers to crunch at them,” said Zittrain, who nonetheless worries that such transformative technology could have “a dark side to reckon with.”

Such segmenting of work into small slices that can be parceled out to an “ocean of labor” erodes the notion of the typical workplace, and of the traditional workday. Over time, it could alter numerous pillars of the economy.

“I do think this could stand to transform economic dynamics … in the way in which it can turn almost anything into an economy.”

Finance

The Harvard experts say the U.S. financial system needs stronger controls, although the recently passed 2,300-page Dodd-Frank reform law is a helpful first step, as is the creation of a consumer financial protection bureau.

Yet many of the largest financial institutions still have an incentive to take on too much risk, said Harvard Business School professor David Moss, who fears that could help eventually to prompt another fiscal crisis. His prescription for fixing the financial industry includes tough but targeted regulation. Large, pivotally placed firms should be aggressively reined in, said the John G. McLean Professor of Business Administration.
While the Dodd-Frank law represents an “important step in the right direction,” Moss would like tighter limits on the amount of leverage — the borrowed fiscal resources available for use — that large financial companies can hold.

As written, the law leaves too much discretion to regulators, he said, particularly concerning the largest institutions. “There are a few specific lines drawn in the bill, but I would have liked to see them even stricter,” Moss said, adding, “Now it’s up to the regulators to get it right.”

Daniel Carpenter, the Allie S. Freed Professor of Government, said the consumer protection bureau developed as part of the new law will rightly be able to create rules for marketing loans, mortgages, credit cards, and other consumer products. But he said there is also a need for a type of “financial epidemiology, or real-time tracking, of the risks and performance of new financial products and contracts.

“There are steps toward this in the Dodd-Frank bill,” said Carpenter, “but I would like to see more.”

Brigitte Madrian, director of the social sciences program at the Radcliffe Institute and Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School, expressed some concerns over the new regulations.

Many consumer-financial products do not come under the umbrella of the new consumer protection agency. For instance, insurance is largely regulated by state agencies. She also worries that some financial firms, in response to the new regulations, will simply “re-engineer their products in ways that actually make consumers worse off.”

“It is an open question as to whether the agency can indeed work to improve consumer financial regulation in a way that benefits consumers without stifling financial innovation.”

Health

Then there is the impact of health care costs on a healthy economy.

An old maxim says that healthy human capital equals a healthy, robust economy. Vigorous workers perform better and produce more. Investing in preventive health care aids that process, but authorities agree that more needs to be done.

The Obama administration has made substantial commitments to preventive health care, in part through its universal care initiatives and through policy changes that require health plans to waive co-payments for preventive services, said Meredith Rosenthal, associate professor of health economics and policy at the Harvard School of Public Health.

But there is too much waste in the health care system, she said, from exorbitant spending to squandered resources. Rosenthal said officials could impose tighter cost controls in part by trimming funding from areas with outsized clout and leverage, including some doctor and hospital groups.

“We need to recalibrate the way we pay for care,” said Rosenthal, “so that we encourage effective and efficient care delivery rather than just more care.” Replacing fee-for-service payments with bundled payments that “pay a fixed amount for an entire episode of care or a whole population” would be a good start.

Services including endoscopy, diagnostic imaging, and high-tech interventions, such as robotic surgery for prostate cancer, usually cost those who pay the bills more than the expense of production, she said. That gives providers an incentive to oversupply such services.

She said that other health care waste is caused by poor coordination, especially when information is not properly cataloged or tracked. Redundant tests and preventable hospitalizations can occur simply because no medical staff members followed up with patients after their discharges.

Infrastructure

Long-range investments in public infrastructure, clean technologies, and green energy are also important ways of improving the economy, said Carpenter.

While the Obama administration has taken some steps in that direction, Carpenter fears that the United States is “in danger of being left behind” by China and India. He advocates investing in light rail, transportation support, and “rebuilding the infrastructure that we currently have.”

A long-term commitment to such investments also could help draw top talent away from Wall Street.

“Too much of our human capital has been taken up by finance and housing. It’s not clear that creates a better economy in the long run,” he said. “We ought to be retraining people for clean energy work, or building bridges and light rail systems, instead of building new homes.”

The dean of Harvard’s Graduate School of Design also promotes investing in infrastructure to breathe life into the economy.

“There is a lot of scope in thinking about infrastructure in ways that transcend its mere functional use,” said Mohsen Mostafavi, who is also the Alexander and Victoria Wiley Professor of Design.

Mostafavi used as an example the banks of the Seine River in Paris, which in summer are transformed into cafes, restaurants, and even beaches, thereby becoming places for both enjoyment and employment. He also pointed to a railway system that connects the city to the suburbs. Such connections are “empowering and enabling,” said Mostafavi, adding, “access becomes the basis for jobs.”

Harvard’s role

Around the University, researchers and academics continue to explore the economic malaise and possible solutions.

Direct connections to Washington’s policymakers include Larry Summers, the former Harvard president and current director of the National Economic Council, who will return to his post as the Charles W. Eliot University Professor at the end of the year, and Elizabeth Warren, the Leo Gottlieb Professor of Law, who is helping to establish the Consumer Financial Protection Bureau.

Signaling the importance of finding economic solutions, Faust will convene next week’s panel, which will include Rogoff; Madrian; John Campbell, chair of the Economics Department; Richard Freeman, Herbert S. Ascherman Professor of Economics; and David Scharfstein, Edmund Cogswell Converse Professor of Finance and Banking.

In many ways, Harvard itself is an ongoing economic engine. Campus organizations such as the Technology and Entrepreneurship Center at Harvard (TECH) encourage collaboration among students, faculty, alumni, and industry leaders. The organization offers a course on the fundamentals of innovation, has a $50,000 grant competition, and maintains a studio space open 24 hours a day, seven days a week, for undergraduates who hope to start the next big business.

Many are well on their way. With help from business builders, as well as entrepreneurs, students in the program have created software and web-based companies such as Gtrot.com, which combines social networking with student travel, INeedAPencil.com, which provides free online SAT prep for low-income students, and NaviTour, a virtual foreign language teaching tool.

“Students come here because they want to change the world,” said Paul Bottino, TECH’s co-founder and executive director. “We want to help them connect to their passions, and then create their own reality, their own economy.”

Harvard’s Office of Technology Development (OTD) also connects researchers with entrepreneurs and venture capitalists, and typically helps to launch eight to 12 companies annually, as well as to license new technology.

“University research has always been a driver of the economy,” said Alan Gordon, director of business development at OTD, adding that his office “helps accelerate the movement of innovations from the lab to the market.”

Values

In addition, some Harvard experts believe that people should step back from the economy’s particulars more often and focus on the moral dimension.

Organizations such as Interfaith Worker Justice, a network of people of faith who educate and mobilize the religious community around labor rights, can prompt meaningful discussions on the economy and its effects on workers, according to a scholar at Harvard Divinity School (HDS).

In the past, religious traditions have weighed in on the material conditions of people’s lives, said Bethany Moreton, a research associate and visiting faculty member at HDS.

“It was always at the center of what prophetic religion felt it had a right to speak to. It took enormous amounts of cultural and intellectual work to declare something ‘the economy’ and remove it from the realm of religion and morality and social action.” Today, the notion of the economy is instead “in this pseudoscientific realm,” she said. “We can only describe it. We cannot control it, or opine about it, or address it in moral terms.”

Moreton believes that discussion of such matters ought to return to the pulpit and to congregations across the country. “The crisis itself has made these topics feel again like something that we have the right to address in moral terms.”