ECON 100 The Economic Czar - Answer

St. Charles  Community College
ECON 100    Survey Economics
Answer to Class Discussion Question



Suppose you are the all-powerful economic czar of this country.  Suppose your politics are such that you believe that our Federal  government is too large.  Suppose you want to expand the economy.  How would you do this?  (Think of as many techniques as you can.)

Answer:   

The key to this question is to think of economic variables, other than government spending, that can affect the size of an economy’s GDP.  Then, when those variables have been identified, the idea is to determine how much that variable will affect the economy.   Possible answers are:

  • You could increase the money supply.  As we have discussed in class, the three techniques that our FED uses are:
  • Through the Open Market Committee operations.  
  • Decreasing the reserve ratio.  Don’t forget the money multiplier (See page 485 in the text.).
  • By lowering the discount rate.  Don’t forget the if the discount rate technique is used, the money multiplier is still an important factor in increasing the monay supply.
  • You could borrow the technique used in many third world countries, you could print more money.  This technique is inflationary, and it is a mistake in the long run, but it can spur the economy.
  • You could cut taxes. 
  • A decrease in the personal tax rate has two advantages.   It increases disposable income which in turn increases consumption through the marginal propensity to consume, and it increases the slope of the consumption function which increases the evpenditure multiplier which spurs the economy in many ways. 
  • A decrease in the corporate or other business taxes will increase corporate profits which could increase retained earnings and future investment.
  • Remember the tax multiplier (- MPC/MPS).
  • You could pass laws that encourage saving. 
  • An example of this might be to increase the amount that households can place in an IRA or in a 401K program.  Along that same time, you could make all IRA funds fully deductible as relates to Federal income taxes.  
  • As we discussed, an increase in saving means an increase in investment.
  • You could encourage investment by changing the tax laws to change the depreciation rates.
  • And what about President Bush’s idea of privatizing the Social Security System.  It has been tried in other countries and appears to be working (in Chile, for example).  That system would increase the value of the Social Security Fund and pump more money into private investment.
  • Doing away with the capital gains tax on dividends should encourage investment.
  • You could institute a program by which our State Department would push American products to foreign buyers.  These products could be both military and non-military in nature.
  • Akin to this idea is that the State Department could be encouraged to start negotiations for additional free trade zones along the ideas of a NAFTA.   For example, there has been talk for some time of expanding NAFTA to include more countries in Central America.
  • And while we’re at it, how about a tax break on income received from exports.  This should:
  • Encourage suppliers to seek out export markets by making those markets more profitable and, therefore, more attractive.
  • The expansion of these export markets should increase employment.
  • Policies to increase our labor supply could be initiated.  Such policies could be helpful in a tight labor market.  Examples of such policies are:
  • An altering of our immigration policy could be initiated.  This could be directed to specific industries such as the idea that was proposed to permit up to 200,000 computer specialists into this country.
  • The changing of our Social Security Laws to change the amount that retirees on social security can earn without affecting their benefits.
  • Giving federal tax credits to employers who hire potential employees who are currently on the welfare rolls.   This may not be possible due to the restriction on this assignment that says that government spending must not be increased.  This may have to be a formal government program in order to monitor such hiring to prevent mismanagement and fraud.
  • Never underestimate the ability of some of our leaders to make consumers “feel good” which could increase expectations and thereby increase consumption.  Two examples of leaders being able to do this are Franklin D. Roosevelt with his ‘the only thing we have to fear is fear itself” and the speeches of Ronald Reagan.  The opposite is Jimmy Carter’s “there is a malaise in this country” in which he was accused of creating negative expectations throughout the population.


      4/9/05