Proposal of solutions to our struggling economy

Recently, a lot has been said about the economy. It is predicted that unemployment will remain stubbornly high through 2012. The Federal Reserve has been called upon to act and Fed Chairman Ben Bernanke has hinted on doing so. There are many different opinions on whether or not the Fed should exist, what it should do, and how far should it go in doing so.

First, we must recognize that the economy is influenced by the actions of the government. Austrian economics argues that whatever the government does is useless if not harmful to the economy. That simply is not the case. There are correlations in the economy that are undeniable. One example is, a weak dollar raises commodity prices and the value of the dollar is affected by the supply which is determined by the FED.

Second, fiscal, or monetary policy alone does not make the sizable impact on the economy as a combined effort of the two does. This can be proven by the events of the 1970s and 1980s when the Fed implemented the great monetary experiment and cut inflation rates by increasing unemployment. The reason that things worked out well was because of the fiscal policies of the Ronald Reagan administration cutting taxes and regulation, stimulating the economy and leading to the 1990s boom.

I believe to have a solution to the problem we are facing today. The Fed is expected to come out with a third round of quantitative easing. What we have learned from the first two rounds is that giving money to corporations to trade in the financial market only saves people’s mutual fund accounts and does not improve the condition of the economy. What I suggest is a solution that puts money in the hands of the people of our country.

Roughly 54% of U.S Debt is held by U.S Citizens. Even if we choose to buy back through the Federal Reserve 50% of debt held by U.S Citizens, we would be cutting $4.05 trillion out of our national debt which will serve two purposes. One, what was a piece of paper that said the U.S Government owes you money is now cash in your pocket which, as long as someone does not bury in the ground, is helping the economy. Two, objections toward making the fiscal policy more economically friendly for people to invest in the United States is faced with the question “How are we going to pay off our $15 trillion debt?” Well our debt will be cut by 27 percent in one year, making it feasible to cut taxes and reduce government revenues, which we will get into later.

The reason this is so is because of a little known fact. The purpose of bonds is a double edged sword. One is of course the obvious which is to raise capital for government program of some sort. The other is to control the money supply. By issuing bonds the government is essentially taking money out of the economy by buying back bonds that same money is being pumped back to the economy.

Now we must combine this action of the federal reserve with that of the fiscal policy of the the Federal Government. First, we must recognize the Laffer Curve. Arthur Laffer famously proposed that if revenues are graphed in the y axis and effective tax rate in the x axis, the shape that would be formed is that of an inverted parabola (an upside down “u” shape). He proposed that at some point tax rates would be so high that people wouldn’t want to work. Inverse to that is that the lower the tax rates, the more people want to work and make money because they get to keep more off of it. Considering that we would have our national debt under control, we should step in and cut in and cut taxes at the same time. Doing so would be the economics version of the two step (ha ha ha).

Put in the simplest way, in a boxing match, landing one average punch is not as valuable as a series of punches in a combination. Cutting taxes by themselves or buying back bonds are good, but they are great when done together. Doing so ensures that we are not cutting taxes beyond what we can pay for or putting money in the hands of Americans, the ones that will spearhead a recovery.