The sub-prime mortgage market meltdown in the United States together with the escalating energy and food prices and the enormous cost of the war in Iraq has placed the world's largest economy under a tremendous strain.

Predictions on the short to medium term outlook for economic activity range from sluggish growth to a severe recession. Indeed, the policy makers in the US have already designed and implemented a counter-recessionary program consisting of a fiscal stimulus package (tax rebates to low and middle-income families), the bail out of Bear Sterns (a large investment banking company throttled by the sub-prime debacle) and in the monetary sector, a series of interest rate reductions to stimulate investment and lending activities with a view towards expanding GDP.

Notwithstanding the economic stimulus package, experts maintain the view that a recession is imminent; some argue that it is already here. Any serious US recession means, among other things, that US consumers would have less to spend particularly on big ticket items such as vacations abroad to places such as The Bahamas.

A drop off of US visitor arrivals and expenditure in The Bahamas translates into a slow down in economic activity locally and unless there is an effective economic policy response, it could mean rising unemployment at a time when prices are rising everywhere. If we are to stave off or mitigate an economic recession brought on by a slow down in the US economy, what are our policy options?

In a manner similar to the United States, consideration ought to be given to stimulating one or more of the principal components of GDP: Increasing consumption by households, increasing investment by businesses and/or providing tax relief by the government.

Unlike the US, The Bahamas and its fixed exchange rate limits any policy options that involve stimulating consumer demand by perhaps, lowering interest rates to create credit expansion; such a move, in absence of an enormous amount of foreign currency reserves, could be counter productive.

In a similar vein, any attempt to increase consumer income to stimulate GDP by way of a tax rebate or the lowering of existing taxes may prove to be fiscally irresponsible on account of the inevitable widening of the deficit and the need for increased government borrowing to cover it.

In view of those constraints, the only viable options would appear to be a concerted focus on stimulating business investment, both domestic and foreign; increased government expenditure, particularly in the area of capital goods (construction of government buildings and low-cost housing); and substantially increasing governments income, not by taxation, but by the sale of government assets, which in the Bahamian context could mean an acceleration of the privatization process beyond the sale of The Bahamas Telecommunications Company to include other state-owned entities as well as the sale of other government-provided services such as the tug boat and the sand-dredging operations.

An economic stimulus package that involved some combination of increasing government revenue without having to increase taxes; increasing investment with an appropriate emphasis on foreign direct investment inflows (by way of a judicious use of a range of new incentives and an acceleration of any projects currently in the pipeline); and finally, an expansion of government spending on those capital products that have a very large component of local labor as is the case in the construction industry, should provide the necessary momentum, with an added multiplier effect, to lift the country out of a recession at best or to moderate, to a large extent, any fallout we are likely to experience from the predicted slowdown in US economic activity.