Rethink and redesign economic policies

Comments on Stephen Grenville “Curing the US policy paralysis”, 16/08201, http://www.businessspectator.com.au/bs.nsf/Article/US-debt-ceiling-economic-policy-politics-deficit-f-pd20110815-KR8BT?OpenDocument&src=rot

While the suggestions in the post are obviously rational economic thinking, they may encounter stiff political headwind at the current political and government deficits and debt environment.

I think any rational economic arguments must take into account the current environment and constraints to be feasible and practical.

The US obviously needs to increase tax, or reduce expenditure to be fiscally sustainable. But at the same time, fiscal policy should have a real expansionary effect to stimulate the economy and get it back to normal growth and to reduce unemployment.

The two may apparently appear to be contradictory ad unreconcilable. However, the right fiscal policy can still be designed and implemented.

What the US, and indeed many other west economies which are having similar problems, need is to shift from the pure quantitative fiscal thinking in economics to designing the a better structural fiscal policy to increase the real effectiveness of fiscal policy.

For example, the practice of work for the dole program that has been seen in Australia could be supplemented by directing the "workers" to work for government public work, or for private enterprises to have a win-win-win situation for both the government, private enterprises and the unemployed.

In fact, many policies could be redesigned to make the same quantity of fiscal expenditure to have a much greater effect, so to increase the effectiveness or productivity of fiscal spendings.

In terms of increasing taxes or ending the tax cuts, a more politically feasible option is to end or reduce the tax cuts for all, both rich and poor, by the same proportion, at the same time, the US government could make those reductions a low or no interest 'loan' available to the same people. In that way, the fiscal sustainability can be achieved while the impact on real consumption is minimised.

So, if economists and government policy makers are innovative and creative enough, the current economic problems can be resolved.