Wall Street and Washington may be overly focused on what the Federal Reserve will do next week at its policy meeting. What about fiscal policy to boost both the slowing economy and the dollar? Here are three different takes on that issue. First up, an analysis by Cesar Conda, former domestic policy adviser to Vice President Cheney:
On the one hand, the long-bond is down and the yield curve is inverted, which suggests that the Fed may be too tight. On the other hand, key commodity prices such as gold, silver, and especially oil remain high, while the dollar exchange rate has declined, suggesting that there is adequate liquidity and that inflationary pressures remain.... Instead of pushing the Fed to unnecessarily cut interest rates, Wall Street investors, the media, and others should put the onus on Congress to boost the U.S. economy by cutting tax rates. Making the Bush tax cuts permanent, especially the capital-gains and dividend tax reductions which are set to expire by 2010, would lift the cloud of economic uncertainty. Cutting the U.S. corporate tax rate—currently the second highest among industrialized nations—would not only improve the cash flow and profitability of U.S. firms in the near-term, but greatly enhance their ability to compete in the global marketplace over the long-term.... The bottom line is this: The Fed must keep its eye on inflationary pressures and resist unjustified interest-rate cuts. Washington policymakers must act now to cut taxes and rein in government spending in order to create an unambiguous future environment for economic growth.
Martin Feldstein, a chairman of the Council of Economic Advisers under President Reagan, also wants to cut taxes, but as a short-term move:
What's really needed is a fiscal stimulus, enacted now and triggered to take effect if the economy deteriorates substantially in 2008. There are many possible forms of stimulus, including a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability. There are also a variety of possible triggering events. The most suitable of these would be a three-month cumulative decline in payroll employment. The fiscal stimulus would automatically end when employment began to rise or when it reached its pre-downturn level. Enacting such a conditional stimulus would have two desirable effects. First, it would immediately boost the confidence of households and businesses since they would know that a significant slowdown would be met immediately by a substantial fiscal stimulus. Second, if there is a decline of employment (and therefore of output and incomes), a fiscal stimulus would begin without the usual delays of the legislative process.... Some reliance now on a fiscal stimulus rather than easier money would also take pressure off the exchange-rate adjustment. While further declines of the dollar are necessary to shrink the massive U.S. trade deficit, continued rapid declines might lead to counterproductive retaliatory actions by some of our trading partners.
Liberal economist and former Clinton Labor Secretary Robert Reich likes Feldstein's idea with an addendum:
All we need do is recognize one simple fact: Lower-income people spend a larger portion of whatever extra income they get than those with higher incomes ... So every dollar of a tax cut aimed at lower-income Americans packs a bigger stimulative punch than a dollar of tax cut aimed at those with higher incomes. By the same logic, every dollar of a tax increase on higher-income people has a smaller detrimental effect on their purchases than would a dollar tax hike on lower-income people. Get it? The best way to stimulate the economy without adding to the national debt is to cut the taxes of lower-income Americans and pay for that tax cut by raising taxes on those with higher incomes. Presto—a simple formula for being both fiscally responsible and also fiscally stimulative. (That this is also a step toward a more equitable tax burden is an extra bonus.)