How the income tax can help the Federal Reserve maintain full employment, price stability, and reduce wide interest rate swings.
We need to modernize how we correctly control inflation and inflation psychology to help reduce deep recessions, high appreciation/inflation rates, and improve our trade, and budget deficits.
We need the correct tax policies to get our economy off the economic roller coaster of Gloom, Boom, Doom economics!!
The Federal Government can guarantee the purchasing power of money without costing it a dime.
Our economy, and financial sector has changed considerably over the last 54 years. We no longer have a closed economy. We are the largest economy in a global economy. Our GNP affects other countries economies, and visa versa. Our monetary and fiscal policies affect other countries monetary and fiscal policies, and visa versa. We have been using outdated monetary, and fiscal policies for too long. These outdated policies do not work well with a modern global money market system, which can expand liquidity as long as there is a willing buyer, and a willing seller for securities, or it can contract liquidity very fast if there is more sellers of debt than buyers. As economics Professor Perry G. Mehrling of Columbia University states, " The world's dollar money markets fund the capital lending markets."
World money markets have the ability to greatly increase the money supply (credit) in an economy. Even when the Fed raises the Fed's funds rate US dollars continue to flow into our economy from around the world if there is a demand for them. It is the world dollar markets that determine the prices of money (debt) in our economy. The Fed has no direct control over the shadow banking system, which includes the world's dollar money market funds. The current out-dated monetary, and fiscal policies we are using helped create the bubble decade of the 2000s, and the rise, and collapse of primary home prices from 2000 to 2008. Thus helping to create the financial crisis, and the Great Recession. We need new fiscal policies that will help make the Fed's monetary policies more efficient, and effective.
Sign in or register to Coursera.org for free video lectures by economics Prof Mehrling. Pay close attention to last 5 video lectures in Part 2 of Economics Of Money And Banking.
The CPI does not measure the cause of inflation. It tracks price increases of a basket of goods and services. The increase in the prices of assets creates equity which allows the financial sector, with the fractional banking system, create the excessive money (debt), that creates inflation. As asset prices rise it feeds upon itself, creating more, and more debt/money, and higher inflation rates. The way to control this process is not to increase interest rates, but by reducing people's desire to go into financial institutions, and taking out a loan, during the high appreciation/inflation cycle.
The middle class is the backbone of our consumption economy. Their disposable income must be maintained to maintain prosperity, and our standard of living. Our military, and economic strength is derived from the taxation of the middle class, and their ability to participate in the economy. The overhang of debt of the middle class, created by the financial crisis, is depressing the economy. The Fed is re-inflating real estate, and asset prices to create the "wealth effect". This process is not going to be a long term solution to our economy's problems, because the increase in asset prices is investor driven, not consumption derived. The middle class's incomes are not rising to support the single family home, and asset price increases. If wages do not increase, the middle class will have to use credit to maintain their standard of living. If the middle class takes on more debt, if they can obtain it, will work to increase GNP a little, and for a short time, and then demand will fall, because of the debt load.
How do we create a sustainable economic recovery?
Macro economics is not an exact science. We have experienced that fact over the last 100 years ever since the Federal Reserve (Fed) was created, and the Federal government has become proactive about keeping the economy moving. Sometimes the Fed is too early, or too late with their monetary polices. Or they stimulate too much, or too little. They raise interest rates too high, or keep them too low for too long. The Federal government will use too much fiscal policy to stimulate the economy, or not enough stimuli. The government will create tax policy that is ahead of the economy, or behind the economic cycle, or tax policies that should have been eliminated, as the economy changes, from recession to the high appreciation/inflation rates, are not eliminated, or neutralized.
You can refer to the needed policy change, as an "automatic adjustment of tax policy", to help correct domestic financial imbalances before they create financial crisis. This is something the Fed, or Congress hasn't been able to accomplish. Fed Chairman Ben Bernanke said, "If there is a housing bubble, we will clean up the mess when it pops." Also because the US has had a trade deficit for many years, the money flowing into the country, to fund the increasing public and private sector debt, was improving our current account balance, without raising interest rates. Congress couldn't agree on anything to slow down the primary home market. To them the economy was booming, and that meant more tax revenues to pay for two wars, and other cost.