MICHEL MARTIN, HOST:
The Federal Reserve has been trying to bring down inflation by raising interest rates. The idea is to make borrowing harder and to encourage saving, but this approach has problems. So what if the government took a more direct approach in its inflation fight by forcing people to save more? That's called compulsory savings. Darian Woods and Wailin Wong from our daily economics podcast, The Indicator, explain.
DARIAN WOODS, BYLINE: Lachlan Kerwood-McCall is an economist who's spent a lot of his career working in the Australian public sector. He's also a member of the Australian Labor Party and was at a talk at one of their meetings a few years ago where he formed this idea about a new way to fight inflation.
LACHLAN KERWOOD-MCCALL: It just struck me at the time that interest rates were something of a clumsy and imprecise tool for reducing demand.
WAILIN WONG, BYLINE: Lachlan believes that higher interest rates benefit banks at the expense of borrowers, and that's up for debate among economists because banks' borrowing costs also go up with rising interest rates. But in any case, it's part of why Lachlan doesn't like higher interest rates.
WOODS: So Lachlan started thinking about saving schemes like the 401(k) or Social Security in the U.S. What if each worker was given a retirement savings account by the government and every paycheck, a small percentage would come out of your take-home pay and put into that account? When inflation was low, this would be a small share. But when inflation was high, a higher share of your paycheck would go into that account, and you could only spend that money once you've retired. And by locking that money away, there'd be less spending in the economy and inflation would come down.
KERWOOD-MCCALL: Why not take money off of households and lock it away into long-term retirement savings so that workers can enjoy a higher standard of living later in life?
WOODS: Lachlan started to talk about this idea with other economists. And some said, you know, the 20-century economist John Maynard Keynes wrote about this, too, in World War II?
KERWOOD-MCCALL: Someone else has already had my idea, and it's the greatest macroeconomist of all time.
WONG: Lachlan built off Keynes' writing and wrote a paper for his master's degree in 2020. We sent that paper to Corina Boar. Corina is an assistant professor of economics at New York University. And she had critiques for Lachlan, starting with the problems of coercing people to save.
CORINA BOAR: If that amount of savings doesn't coincide with what the consumer would have chosen on their own, then the consumer will automatically be worse off. That will end up hurting poor workers who do rely on their wage to make ends meet.
WONG: We brought Corina's critiques back to Lachlan.
KERWOOD-MCCALL: The state already believes it knows what's best to do with your money. It raises interest rates because it doesn't believe you should be spending as much money during an inflation episode. I think, if anything, that critique ignores the fact that, say, under my proposal, individuals would actually get their money back at the end of the day, unlike under the current system where they don't.
WOODS: Lachlan adds that lawmakers could carve out exceptions for lower-income workers. But Corina Boar ultimately just doesn't agree with Lachlan's assessment of the downsides of the current orthodoxy, and she says the biggest problems with the current approach of raising interest rates would also be a problem with compulsory savings - the risk of generating a recession. As for Lachlan, he says we need alternatives to conventional monetary policy.
KERWOOD-MCCALL: Economics is supposed to improve over time. We're supposed to develop new ideas and come up with better ways of handling economic problems.
WOODS: Darian Woods.
WONG: Wailin Wong.
WOODS: NPR News.
(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.