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I don’t believe there is any way to increase employment significantly without raising the rate of economic growth. Therefore, the real question is how to raise economic growth. I continue to believe that the economy’s fundamental problem is a lack of aggregate demand.
I think a dose of inflation is just what the economy needs, and libertarians should stop being so obsessive about it. Moreover, I think at some point they need to admit that the Fed cannot raise aggregate demand by itself when the economy is in a liquidity trap, which it obviously is based on the level of interest rates being close to zero.
Under these circumstances, I believe that some form of aggressive fiscal policy is necessary to get money circulating, raise the velocity of money, and get the economy out of a liquidity trap. I do not believe, under current circumstances, that there is any type of tax cut that would achieve this goal; only direct spending by the government on purchases of goods and services will help. Therefore, the Fed will, somehow or other, have to figure out how to raise aggregate demand by itself.
The only other thing I can think of to raise growth would be a deliberate devaluation of the dollar, which would raise exports. Theoretically, the Fed could buy as much foreign currency as necessary to bring the dollar down. But this is impractical because foreign countries can retaliate by buying dollars with their own currency or imposing restrictions on U.S. imports. Any policy of devaluation would be strenuously opposed domestically by those who are obsessed with the idea that the dollar should be strong regardless of the economic conditions.
I realize that everything I have just said is totally contrary to the libertarian worldview. However, I believe that implementation of libertarian policies, such as cutting spending and tightening monetary policy, under current economic conditions will only make it worse. I support any regulatory or deregulatory measure anyone can think of to reduce unemployment, but am disinclined to think there are any that will have more than a trivial effect under current macroeconomic conditions.
Bruce Bartlett was a domestic policy adviser to Ronald Reagan and a treasury official under George H.W. Bush. His most recent book is The New American Economy (Palgrave Macmillan).
Cut Payroll Tax
Easy: Cut employers’ share of the payroll tax.
Bryan Caplan is a professor of economics at George Mason University. His most recent book is Selfish Reasons to Have More Kids (Basic).
Repeal Financial Regs
Repeal portions of the Bush-era Sarbanes-Oxley Act to make it easier for smaller companies to raise capital by going public, and thus expand and create thousands more jobs.