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The Three Essential Keys to
A Credible and Effective Recovery Policy
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An ad hoc "economic stimulus" is not a RECOVERY policy. Most "stimulus" proposals are politically uninspiring and un-credible because they have no explicit goal, focus or process -- and because they ignore the key role of Federal Reserve monetary policy. A credible RECOVERY policy must have three key aspects:
- Proclaim below-4% unemployment as a key government responsibility. Give people hope and confidence that they can safely plan ahead. Political leaders unable or unwilling to make a firm commitment for that goal implicitly admit that they don't know how manage the economy -- or, in Bush's case, that they really don't want a full employment.
- Require the Fed to "accommodate" that commitment by financing a "fast-but-soft-landing" recovery growth-track. End the irresponsible "forecast and hope" policy and the interest rate charade. "Fiscal stimulus" unsupported by adequate money growth will be ineffective, and the associated federal deficit wasted.
- Systematically coordinate monetary and fiscal policy. Pay a quick "Recovery Bonus" to those most likely to spend it immediately -- the unemployed, lower-income employees, and desperate state and local governments now forced to exacerbate the recession by cutting jobs and raising taxes. And NO permanent tax cuts before the budget is balanced and unemployment is below 4%. These are aspects of a class war strategy that provides little economic stimulus.
In the context of a well-coordinated recovery policy, the quick deficit-financed recovery bonuses to jump-start recovery are a fiscally an economically responsible federal investment (similar to credit-financed business investment) that will pay for itself by the recovery of federal tax receipts and reduction of federal "depression-relief" costs.
Once recovery is credibly underway, normal private economic incentives will carry it forward -- as long as the Fed continues to finance the fast-but-soft-landing recovery track.to assure business executives that borrowing money to hire more workers and increase capacity will pay off in increased sales and profits, rather than recession and bankruptcy, and to assure consumers that if they borrow money to finance "consumer investments" like houses and cars they will not again lose their jobs -- and their investments.
Every "economic stimulus" proposal -- by Congress, Bush or other candidates for president or Congress, or by private economists -- should be tested against these three fundamental criteria.