My plan for America's economic future

A comment I made at Reddit:

I also happen to think Obama and the Democrats are doing the wrong thing. Keynesian stimulus programs work best when there is little, no or negative government debt. While it is fair to say that Hoover did the wrong thing by enforcing Austerity Hoover didn't have public debt of 55%+ of GDP. Because of the huge build up of debt before this recession (thanks mainly to Reagan, Bush 1 and Bush 2 and the Republican party in general) the current clime is not amenable to effective Keynesian stimuli.

What is left then? The only real possibility is monetary policy: adjusting the money supply to prevent deflation from getting too bad. At the moment monetary policy is hindered by laws preventing more creative options by the US Federal Reserve (eg creating money by fiat and giving it to people; creating money and depositing it into commercial banks, thus increasing their reserves and making them more likely to lend). Certainly Friedman was correct when he said that the Great Depression was hindered by high interest rates from the Federal Reserve. The Fed (and all central banks) always have the ability to control the money supply through open market action (buying bonds) and setting interest rates (as well as the more creative methods I have mentioned). Controlling the money supply won't result in any increase or decrease in money velocity (money demand) but it will result in stable prices (stable being defined as neither too much inflation nor too much deflation).

So my solution would be to kill the debt by raising taxes on the rich, instituting a market capitalisation tax and cutting defense spending. Since this will cause the economy to contract, and because a contraction will lead to deflation, the Federal reserve can pump more fiat money into the economy (via the regular and creative methods I described above) to keep prices stable. The result will be a longish, shallow recession alongside a reduction in government debt, which will make the inevitable recovery more sustainable.

But of course none of this directly addresses other major obstacles on the horizon, namely Peak Oil, overpopulation and global warming. With these very real problems it becomes more important than ever for the government to reduce its debt level to prepare for the coming crisis. Government will have to increase in size to create a negative-carbon, zero-oil dependant society alongside a steady-state economy and an ageing population in line with low birth rates and increasing natural death rates. And with this increase in expenditure must come a commensurate increase in tax revenues and tax rates.

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