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Business Cycle
We seem to go through periods of boom and bust. Is there a way to design the economy so that it stays on a more even keel?
The key factor in preventing full employment, is wage inflation as labor approaches 100% utilization.
Government can create additional demand in the economy by funding socially beneficial, non-profit making activities such as: research, education and infrastructure improvements as long as inflation can be kept under control.
Controlling Inflation with a National Sales Tax
What if we recommend that everyone above the poverty line carry a little debt. Business and government should also carry debt.
Then, rather than manage to the size of the debt, we manage the interest payments on the debt. Let's say that individuals should plan their budget to allocate 1% to interest on the family debt. Business and government should allocate 2% to interest payments.
The Federal Reserve tries to control inflation by modifying the interest rate. So when there is high inflation, the interest rate goes up and everyone pays down their debt to keep the interest payments to the desired level.
When the economy slows down and inflation starts to fall, the Fed lowers the interest rate and everyone borrows more money to increase the interest paid to the desired level.Business and government should use their borrowed money to build infrastructure to improve their operations. Families would used their borrowed money to purchase more expensive items which are normally not in a line item in their household budgets.
This would provide a natural counter balance to keep the total economy supplied with a stimulus when needed or a brake when over heated.
Example:
Assume
40,000,000 households
After Tax Income $ 75,000.00
Interest expense $ 750.00 @ 1.0 %
Stimulus case
Interest rate 4%
Loan balance $ 18,750.00
Inflation case
Interest rate 8%
Loan balance $ 9,375.00
Then
Change in spending would be $ 9,375.00 or 12.5 % of income
Spending change is 40,000,000 x 9,375.00 = 375,000,000,000.00 dollars
That is $ 375 billion dollars
Which is 5 million jobs @ $ 75,000 income
About The economy
In addition, the Federal government should implement a national sales tax. This tax can be raised when inflation starts to increase and be reduced when inflation begins to recede.
Q. What causes inflation?
A. Inflation occurs when there is more money to purchase goods and services than there are the quantity of goods and services available. When the price of a product goes up, business will generate more of the product. So, some inflation is good. But, the rate of inflation needs to be managed to prevent destroying wealth.
One way to control inflation is to tax the sale of the product which is in limited supply to reduce the demand. A national sales tax provides a mechanism to rapidly change the tax on any given product to keep inflation for that product under control.
Controlling Inflation with a National Sales Tax