Five ideas to stimulate the economy

by Nin-Hai Tseng, reporter


FORTUNE -- Despite the $787 billion stimulus plan Congress passed in 2009 following the financial crisis, it's been a painfully weak economic recovery. With unemployment staying at an unnervingly high 9.5%, economists expect growth to continue slowing later this year. This has only fueled talk of the need for another round of government spending.

But how should government spend, or should it be spending more at all? Fortune lists five stimulus plans - some bold, some borrowed, some borderline wacky, but all worth considering.

Give consumers a break: Ease bankruptcy laws

Even if the Obama administration were to stimulate the economy through a tax cut or send a check to the majority of households, it will likely do little to jump-start the kind of spending that could drive companies to hire and invest more. Over-spending in the years leading to the financial crisis is largely what got us in this economic mess. Many households faced with huge debts would use any extra cash to pay down loans or add to savings instead of buying items such as flat-screen TVs or a new outfit.

To ramp up spending, policymakers could make it easier to file for bankruptcy, giving consumers the fresh start they need. In 2005, Congress overhauled the nation's bankruptcy laws, making it harder for people to erase their debt. Even with those stricter rules, 1.4 million individuals filed for bankruptcy last year, up more than 30% over 2008, according the National Bankruptcy Research Center.

There are downsides to this plan, of course. Bankruptcy makes it more costly and difficult for consumers to borrow in the future. And banks, which are already being criticized for not lending enough, would likely be even more reluctant to extend credit.

Create U.S. jobs: Devalue the U.S. dollar

Today's economy seems to play out like a vicious cycle. Companies can't reasonably hire more workers when demand for the things they produce or the services they provide aren't at the right levels. And consumers are likely to refrain from spending when the jobless rate remains high.

So how can we create more jobs? Many economists have suggested driving down the value of the U.S. dollar. A weaker greenback would be good news for U.S. companies such as Boeing (BA, Fortune 500), which could sell its aircrafts cheaper to foreigners. More sales from across the globe could finally convince companies to hire and invest more in the U.S. We saw the benefits of a weaker dollar briefly in early 2007, when U.S. auto manufacturers saw a rise in exports as the greenback weakened. Though the dollar has strengthened some following sovereign debt problems in parts of Europe, it has generally been on the decline in the past several years.

So how could the dollar fall further? Any policy that makes the dollar less attractive can just about do it. For instance, levy huge taxes on foreign investments.

But as with any bright idea, there are shortfalls. A weaker dollar is bad news for U.S. consumers who will have to pay more for imported goods, such as wine from France or cars from Germany. And vacations abroad (such as that holiday in Europe) become more expensive. Plus, the strength of the greenback often indicates the health of the overall economy and a weaker dollar probably won't help in that regard.

Main Street bailout: Forgive underwater mortgages

In 2008, Congress approved a $700 billion package to bail out the banks most hobbled by bad loans. As more and more homeowners owe more on their homes than what their properties are valued, it could be time for a Main Street bailout.

Just last week, rumors were rampant that the Obama administration would force mortgage finance giants Fannie Mae and Freddie Mac to forgive some debt on underwater mortgages. An estimated 15 million U.S. mortgages - one in five - are underwater, according to Reuters' columnist James Pethokoukis, who reported the rumors on Aug. 5.

The U.S. Treasury Department quickly shot down the rumors. Nevertheless, the idea could still be worth considering as policymakers figure out what to do with the troubled companies that the government took over in 2008. True, a bailout would be a political and potentially costly gamble for the Obama administration. But it could help many families return to a state of financial normalcy, just as it did for the big banks.

Rethink 'stimulus:' Spend less, borrow less

Sometimes the best stimulus is almost no spending. Here's an idea borrowed from Fortune's senior editor at large Shawn Tully, who thinks the best stimulus is really no stimulus at all. One of the best ways to steer the U.S. toward a sustainable path to economic recovery is for government to spend less and borrow less.

Tully draws from the experiences of former UK Prime Minister Margaret Thatcher, who attacked huge deficits and rampant spending in the face of high unemployment during the mid-1980s.

Spending less could stimulate the economies in several ways: Tully lists four, including keeping interest rates low, which would spur private investment, as well as lowering taxes, allowing Americans to keep more of their pay. For more, see Tully's June article, The best stimulus? Spend less, borrow less.

Investment-focused stimulus

Here are a few ideas borrowed from Jeffrey Sachs, director of Columbia University's Earth Institute.

In a Financial Times editorial last month, Sachs argues that in all the debate about austerity and stimulus, there's not enough attention on boosting investments as a key to U.S. economic recovery. Debt-ridden consumers will not help the economy recover.

"China saves and invests; the U.S. talks, consumes, borrows, and talks some more," Sachs writes.

If a second stimulus should come up again, policymakers might want to turn to Sachs' five-part recovery plan aimed to boost investments in education, clean energy, infrastructure exports to Africa and other low-income countries, infrastructure renovation efforts and other projects that could help stimulate U.S. jobs and growth. To top of page

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