How to Stimulate the Economy — Another Great Idea

by Mitchell Clark, B. Comm.

I love the idea of the flat tax, as I’ve written previously. To me, it represents the single best idea for fiscal policy stimulus. Current monetary policy stimulus (reduced interest rates and a massive increase in the money supply) is somewhat helpful, but it isn’t really effective when you have a crisis of confidence. This is what the current recession is all about — a crisis in confidence.

I’m absolutely convinced that the single worst thing the government can do is to get involved in running businesses. It doesn’t work, it can’t work, and it just doesn’t make any sense. But, I’m also convinced that the government can play a useful role in creating a helpful economic backdrop that helps end users. End users like consumers and taxpayers.

Speaking of confidence, I know a fair number of people who want to go out right now and purchase a new car. But because of the economy and the constant bad news about the economy, they’re scared to go out and spend the money.

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So, after the flat tax (which I don’t think will ever happen), another great idea to get things moving again is some sort of cash for clunkers incentive to get the automobile industry back on its feet. It’s working in Germany and I’m convinced it can work here, too.

The automobile industry is so pervasive throughout our society (because that’s the way we like it) that it is definitely an industry that’s worth helping. We don’t need to go in and bail out bad business models, but a government incentive program like a scrappage bill would provide enormous incentive for people with the money to go out and purchase new cars. To me, this is one of the easiest and most practical policy choices that would immediately stimulate the economy. We all know that, when business is good, the economic spinoffs from car-makers are enormous. Offering cash incentives to trade in old vehicles for new is a smart way to get people back in the showrooms. It’s also a great way to jump-start the green economy by providing more incentives for vehicles offering better mileage and cleaner emissions.

For me, an ideal fiscal policy to stimulate the economy would be the introduction of some sort of flat tax and government cash for clunkers. The idea is to have a simple, easy-to-administrate tax system that puts more money in your pocket, and then to offer some incentives to go out and spend it. Throw in some special policy treatment to encourage more saving and investment and I think we have the makings of a great stimulus package. I don’t know if it will ever happen but I think these two great ideas are worth talking about.