Tuesday, July 19, 2011

Unconventionnal tools

Economists agree that increasing consumer spending is the most effective way to stimulate an economy out of recession or stagnation. Conventional tools (such as infrastructure spending) are both slow and inefficient. Letting politicians choose how to apply stimulus in recession years is like giving your child a credit card and sending him to Toys R Us. There must be a better way.

Why not give the Fed the responsibility to coordinate direct stimulus in addition to affecting the markets by buying and selling financial instruments? Specifically, the Fed could be given a stimulus fund worth 1% of GDP per year (from general taxation) to be sent to all citizens in the form of monthly cheques when the economy needs to get back on track. Or it could just be trusted to spend the right amount, and possibly need to be recapitalized using general taxation as is the case currently.

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