sent 7 February 2001
Re: "Can Rate Cuts Do the Job?" by Rich Miller and Ann Therese Palmer, and
"Why Not a Payroll Tax Cut?" Business Week, 5 February
Letter to the Editor, Business Week:
In the recent issue of Business Week, one article promotes the idea
of a $48 billion income tax credit against payroll taxes ("Why Not a
Payroll Tax Cut?"), while another ("Can Rate Cuts Do the Job?", by
Rich Miller and Ann Therese Palmer) wonders whether monetary easing, alone,
can cushion the hard landing that lurks over the horizon.
The short answer is that neither of these will be sufficient to prevent a
deep and protracted recession. The Clinton expansion was fueled by
unprecedented private sector deficit spending (right now, the private sector
is spending in excess of its income by a record 8% of income) and borrowing.
As households and firms bring spending into line with income, a demand gap
of at least $450 billion per year will be created. Thus, the size
of the tax cut that will be required annually is at least $450
billion dollars-ten times the amount mentioned in your tax-cut article.
Further, while it is true that lower interest rates will save consumers some
mortgage servicing costs -- $12 billion this year -- this pales by
comparison with what is required.
In any case, given the federal budget surplus and the trade deficit (which
are huge leakages that are not likely to be reduced without significant
policy changes), the Fed could revive the expansion only by inducing
households and firms to embark on another unsustainable borrowing frenzy. In
conclusion, there really is no alternative to a huge fiscal adjustment.
Senator Lieberman and others are on the right track when he argues a payroll
tax cut is the way to put more money into the hands of working Americans.
But they need to think on a grander scale.
L. Randall Wray
Professor of Economics
University of Missouri - Kansas City
211 Haag Hall, 5100 Rockhill Road
Kansas City, MO 64110
phone 816-235-5687, fax 816-235-5263