How to fix the economy

  1. I’m not an economist, so this probably has errors in it.
  2. None of these ideas are mine. I’ll hunt down where I got them from as soon as I can. See citations where I put them in.

Businesses aren’t investing in jobs because they have no reason to. They sit on huge piles of cash and continue to make acceptable profits without adding any jobs. Astonishingly, we manage to be in a period when inflation is nil, but prices are still going up. You know what gets people investing in new things? Inflation. Mild-to-moderate inflation drives capital into investments because otherwise the value of that money decreases over time.[1]

How would someone in charge of, say, the Fed, manage to increase inflation? They start by buying debt from banks, which frees up cash in existing banks to make other loans. Home mortgages would be a great start. The Fed can easily start buying up underwater mortgages and forgive the principal above and beyond the current market value. This puts a floor on the housing market and stops the glut of foreclosures, which gives the construction industry something to do again.

I would also start buying up and forgiving student loans of unemployed college grads. This would put them in a position to take greater risks with their careers, either taking jobs that aren’t directly in their fields or giving them room to start up businesses of their own.

This would be hugely controversial, of course, but the Fed chairman is appointed so that he can make these calls. We need something decisive either way, so someone needs to bite the bullet.

But what about everyday prices? Increasing inflation means, in the short term, increases in prices of stuff in general. True, but with the hardest hit people getting loan forgiveness, their overall costs will decrease. Also, investment in new technologies generally decreases real prices even as apparent prices go up. Finally, inflation doesn’t actually impact the poor significantly because they have little savings. In an economy with inflation, wages tend to increase with inflation.

On the fiscal side, there needs to be a resolution to the structural deficit spending. Most of this comes from the Bush tax cuts. Letting them expire takes care of 1/3 of the problem. Another portion of the problem comes from health care costs in medicare and medicaid. These costs can be amortized over a larger population by combining medicare and medicaid into one pool and opening up that pool to everyone. Medicare and Medicaid take care of the most expensive patients in the country, so opening it up to the rest of us would only decrease the overall risk. [2]

Finally, social security can easily be addressed by increasing the witholding limit above 90k. This will put it on sound footing for the next 100 years, based on figures I’ve heard. [2]

  1. Krugman, Paul. Why Is Deflation Bad? http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/
  2. Reich, Robert. What If Everyone Saw This Clip Of Robert Reich Exposing 7 GOP Lies? http://front.moveon.org/what-if-everyone-saw-this-clip-of-robert-reich-exposing-7-gop-lies