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Preventing an Economic Contraction in 2009

 
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PostPosted: Mon Feb 02, 2009 4:16 am    Post subject: Preventing an Economic Contraction in 2009 Reply with quote

U.S. Economy Expanded 1.3% in 2008

How to prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009):

1. Obama should change his stimulus plan to a $2,000 tax cut per worker (in the form of a tax holiday), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.

2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
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