The problem with the US economy today is weak aggregate demand. When aggregate demand is weak or declining, economists generally advise that both monetary and fiscal policy-makers consider reflationary policies. Reflationary policies to boost the level of economic activity might include:
- Increasing the level of government expenditure
- Cutting taxation (either direct or indirect) to encourage spending
- Cutting interest rates to discourage saving and encourage spending
- Allowing some money supply growth
I maintain that the US should be engaged in monetary expansion and fiscal spending at this crucial time for the economy. The austerity hawks are arrogantly wrong in asserting that less spending will somehow restore aggregate demand and ultimately prosperity for America.