Thursday, July 14, 2011

The Objectives for the Government with respect to the U.S. Economy

It seems to me that there are three interrelated objectives for the government for the next ten to fifteen years:

  1. to reestablish and maintain confidence of investors, lenders, producers and consumers in the U.S. economy
  2. to reduce the ratio of government debt to GDP
  3. to grow the economy
Accomplishing the latter two objectives would help a lot with the first. I suspect that certain kinds of regulatory reforms, such as improving regulation of financial services would also help. If the conditions that contributed to the last financial meltdown are not corrected, then it will be hard to build confidence.

Reducing the ration of government debt to GDP can be approached by:
  1. a modest level of inflation. Three percent per year inflation would increase GDP by 100 percent in 24 years even without growth of the economy in real terms;
  2. reduce government expenditures;
  3. increase government revenues;
  4. grow the GDP.
The GDP is currently growing slowly and that growth if fragile. It would be stronger were confidence higher. Still, probably the immediate priority is to increase demand, and certainly instruments that would cut demand (such as cutting off unemployment insurance, laying off public employees, cutting back on social security payments) would have reduce demand. Continuing certain kinds of stimulus funding seems still to be appropriate.

Increasing the export of goods and services, tourism, medical tourism, enrollment of foreign students, etc. would help grow the economy.

In the long run, government investments that stimulate innovation, human resource development and infrastructure contribute to growth.

This is not rocket science. (As an aside, I actually worked for the Astropower Laboratory of McDonnell Douglas early in my career, which I guess made me a rocket scientist.)

The problem of course is to find how to combine the incentives in a reasonable way. When does the government shift from stimulus to debt reduction, by what proportion. How much emphasis should be given to revenue enhancement versus expenditure reduction? These are issues on which the best professional advice should be sought, not that of the Tea Party true believers, the false pundits on television, or indeed the average Senator or Representative.

Whatever the answers to those questions, it seems clear that default on the national debt is not a good idea!

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