Thursday, July 8, 2010

Time for more stimulus money and long term austerity


This blog writer is in favor of a second, moderate sized government stimulus

The US economy needs another federal spending stimulus boost to continue growing. The economy is sputtering along, trapped in cycle of high unemployment feeding low consumer confidence. We all know that consumption is 70% of the direct economic output in the US. Another fiscal cash injection is need in the short term.

I would recommend spending the money on extending unemployment benefits, aid to state and local governments(SLG), student loans and grants, low income tax relief and long term R&D projects (like oil pollution control). We may have to get used to high unemployment and long-term subsidies for the unemployed. However, the money cannot be given with some productivity benefits to "pay" for the extra money. State and Local Governments must hold the line on pay, retirement and healthcare costs.

The stimulus should be about $400-500 billion dollar area (about 1/3 less than the original 787 Billion investment). Enough to cement the continued growth of the US economy. We must try to get the unemployment rate down to the 7% range to make the recovery psychologically self sustaining.

Longer term, the US economy has some issue to face. We need to shift from a "bubble" economy to a more structurally sound economy, like Germany or Canada, and that won't be easy. We have had tech bubble, a tax cut bubble and now a real estate bubble. Americans need to stop looking for the easy way out. Right now there is no alternative but hard work.

There is some good news. Interest rates at an all time low. Inflation is effectively zero, but not deflationary. We have taken steps to fix healthcare and the banking system. The US still generates the highest per capita income for the most people on the plant.

But there is also bad news. A large number of Americans will be retiring and living longer. This puts tremendous pressure on social security, medicare, private retirement plants and health insurance. Income inequality is growing. Fifteen percent of the working population is unemployed or underemployed.

But luckily, we are in far better shape than other countries to handle the problems.
Our debt to GDP ratio is low compared to other countries. Out growth rate is usually above other western democracies.

It is time to make some painful choices around taxes. We may need to get rid of home mortgage deductions. Put a true price on gasoline and carbon. And learn to live with a lower level of material wealth. We must stop funding wars.

Bling-Bling is out-out. Helping your neighbor is in-in.



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