Saturday, August 13, 2011

What is there left for monetary and fiscal policy?

Monetary and fiscal policy has been used in a myriad of alternatives only to continue to be unsuccessful. The following have been tried:

  • zero policy rates
  • QE1 and QE2
  • credit easing
  • fiscal stimulus - spending on capital projects, temporary tax cuts, increases in transfer payments
  • ring fencing of assets
  • special bank bail-outs
  • special sovereign bailouts
  • targeted housing policies on foreclosures and subsidies.
None have worked effectively at bringing growth back to pre crisis levels. Balance sheets are still being repaired and the government has taken on debt formerly taken on by consumers and business. The need for more radical change is necessary. We have to focus on the structure of the economy. First, there has to be a change in the tax system such that it is simpler and lower especially for small businesses where there is the maximum job creation. Stop talking with large company CEO's and focus on the shopkeeper and entrepreneur. Second, cut the cost of labor not through the asking of wage decreases but through a reduction in costs of hiring and firing and uncertain benefits. Third, increase fiscal spending but only through capital projects that decrease the cost of transportation and power. Fourth, move inflation higher so that real value of debt is decreased.

No comments: