RE: The Politics of Recession

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

 The projected tax cuts (even if fully enacted which I would argue is almost
certainly not going to happen) would have very little change on the spending
patterns of the "middle class". A household with a combined income of 70,000
would pay roughly 10,000 in federal income taxes today. If this couple owned
a home, had children, and was able to take an IRA or 401k reduction, it
would be a bit less. I'm doing the math off the top of my head and guessing
but I guesstimate a reduction in the tax bill of this family from Bush's tax
proposal to be about $1000. Most families below the median will see a few
hundred dollars a year at best. This will not significantly alter spending
patterns one way or the other.

The proposed tax cuts will however reinforce income inequality and return us
to the high structural deficits of the 1980's.

A much more modest tax cut based on eliminating the so called "marriage tax"
and expansion of EITC is both politically feasible and fiscally responsible.
It would target tax reduction at the low and middle ends of the spectrum.

Even so, the more imporant target right now (and i believe the chief villain
in the piece) is a FED wedded to hard money philosophy that has already
slammed the brakes on the economy. An interest rate cut would have far more
reaching and beneficial effect. It will probably have to be
significant-ultimately completely undoing the last year and a half of hikes,
and maybe even then some. It is an open question as to whether or not the
FED will be willing to do this.

The one good sign is rapidly slowing inflation which is being reinforced by
falling oil prices.

I do want to say that I seem to differ with many on this list by my belief
that structural deficits will have the effect of leading to longer term
higher interest rates. This is premised on my difference with the
chartalists who seem to believe that government debt can be issued near
infinitely with no consequences. I disagree. Government debts must be
financed, and high debts that have little prospect of being paid back will
lead to higher risk premiums on that debt (even for hegemonic powers such as
the U.S.).

Note: I am **NOT** arguing that all government debt crowds out and I am not
arguing against all government debt. My argument is against tax policies
that are poorly thought out and recklessly implemented and lead us back to
high structural deficits, and even possibly, BOP disequilibrium.

-----Original Message-----
From: Sven R Larson
To: pkt@xxxxxxxxxxxxxxxx
Sent: 12/20/00 4:56 AM
Subject: Re: The Politics of Recession

Henry,

The problem with the pending recession will not be private debt as such,
but payments on that debt. I disagree with you on the timing of tax
cuts: given that cuts are discussed early in 2001, announced before the
US fiscal year of 2002 starts next fall, and effected during that year,
households will have good reason to expect little impact on their
purchasing power. It will, in other words, keep them from making overly
pessimistic changes to their spending patterns. In other words: so long
as households can be given good reason to believe that they will still
be able to pay principals and interest on their debt even two years from
now, they will not turn whatever they have in assets into debt
reduction. (If they did, considering the strong wealth growth during the
Clinton years that could trigger an ugly acceleration of the recession)
The critical point of a downturn is precisely to keep expectations
healthy - so long as the downturn doesn't threaten to ruin the bulk of
consumer expectations it will stay mild.

Bush is better prepared than Gore to help households land softly in a
recession, as tax cuts are high on his agenda (even higher than budget
balancing was on Gore's...). His problem is to tune them towards the
middle class enough to get the right macroeconomic boost.

What America needs now is not more government spending, but lower taxes
to preserve household cash flow margins.


Have a Keynesian Christmas,


/srl


"Henry C.K. Liu" wrote:
>
> I have suggested that Bush and his team have every incentive to
> pin the inevitable recession solidly on Clinton.  The Fed
> decision today, which I have predicted in an earlier post: "My
> take is that the Fed in December will hold ff rate unchange and
> remove that inflation bias (balance of risk)", confirms that
> strategy.  If Gore were elected, Greenspan would have surely
> lowered ffr today, perhaps even by a full 100 basis points.
> Greenspan's record shows that he has been 6 mongths late in
> responding to recession signals and Fed data are generally 2
> months late.  Thus a reversal of Fed policy only after January
> 20 can be expected  with the perfect excuse of lag time.   At
> any rate, even if Greenspan cuts ffr to 2%, by next June, it may
> not help because of the dollar exchange rate problem.   Bush can
> use a mild recession to push through his tax cut anyway, except
> this one won't be mild by a long stretch.  Some very astute
> economists (easy, Allan, I have names) think that the surplus is
> the problem and that what the US economy needs at this moment is
> a healthy deficit, not from tax cuts, but from government
> spending.  I think these economists are on target, but even then
> it may be too late, because private sector debt is too
> overwhelming.  And the IMF is still going around the global with
> blindly demanding government surpluses.  Its going to get bad
> before it can get better.  The Japanese dceade-long drought
> looks likely to repeat in the US, unless the Fed is prepared to
> sacrifice the US banks, something the Fed has been telling the
> Japanese to do for years.
>
> Henry C.K. Liu
>
> confirm

--
Sven R Larson
PhD; Assistant professor of economics
Department of Social Sciences, Bldg. 22.2
Roskilde University
Pb 260
DK-4000 Roskilde, Denmark
Phone: (+45) 4674 2910