How to Stimulate the Economy #2

How to avoid a recession? After more than sixty years of study and observation of U.S. income, I too have a proposal.

The Fed has already reduced the interest rate, which can be expected to be somewhat helpful in a matter of months. Fiscal policy, however, is the better tool for the state we're in. Our question is how best to increase employment and GDP. The Congress can choose its own programs or choose to affect private spending; it should do both. We should be looking at both speed and strength of stimulus. And while we're at it, we should be cognizant of the effect of what we do on current problems and goals.

The most predictable and the fastest and most powerful tool is government spending. Recall that when the U.S. entered World War II we went from 14% unemployment to a low of around 2% in a matter of months. At that time we started spending on munitions; we don't want more of that now. At the present time we should activate programs that would best fit goals for America, say, e.g., health care for low income children, or universal health care, or providing education for all pre-school children. Or the first steps in addressing the problem of global warming. Or rebuilding our crumbling roads and bridges. Any of these programs or a combination of them could be pursued until full employment is achieved.

Private spending could be a supplement to this. The best way to increase it would be to provide income to the poorest among us. The richest country in the history of the world has a population of around 13% living in poverty. This could and should be alleviated. The IRS could implement a negative income tax, i.e., send checks to those whose income is well below the poverty level. This would be similar to the Earned Income Tax Credit and could be simply an expansion of that to anyone, working or not, having an income below a certain level. These people would be likely to spend all that they receive--an immediate and sizable stimulus.

How to Stimulate the Economy

Everybody but me is talking about how to avoid a recession, ASAP. Here is my plan:

The Congress should look at the social service proposals offered but not adopted during the last two years, e.g., health care for low income children in the US. Programs that seem most feasible, say, those most needed and those that could be implemented most quickly, should be selected for immediate passage, up to full employment. This would constitute an immediate increase in GDP. If those are not sufficient to achieve full employment, other programs such as universal pre-school could be added. An alternative would be not social services but work on infrastructure, e.g., roads and bridges.

The other kind of program that would be most stimulating would be a negative income tax, i.e., payments from the IRS to Americans who have no income or income only below a specified figure. This would be similar to the Earned Income Tax Credit except that it would be only for those not employed.

Immediate staff work would be required to determine as well as possible how much of any such program would be adequate to avoid or reverse recession. Also under consideration from the start should be which of these programs and/or how much of each should be made permanent.

There would be many fortunate by-products of such measures--to be considered at another time.