How Best to Stimulate the Economy

In the face of a looming recession some policymakers, pundits and presidential candidates advocate making the Bush tax cuts permanent. What they fail to explain is how avoiding a massive tax increase on selected Americans in 2011 will help avoid a recession in 2008.

Meanwhile, the press is reporting today that President Bush and Congressional Democrats have reached a deal on tax rebates for households and businesses. What they have failed to explain is how mailing checks in the summer – the IRS is saying that it could not process checks until June at the earliest – will help avoid a recession in the winter and the spring.

Of course if the U.S., like 142 other countries, had a consumption tax the government could simply reduce the tax rate for a period, providing an immediate cost deduction to every household and every business. Unfortunately we don’t yet have such a feature in our tax system.

So, the better way forward at this moment would be to suspend temporarily the collection of both the employer and employee FICA contribution. This would provide an instant 6.5% increase in the purchasing power for every working family. At the same time, this would ease the pressure on businesses big and small. New hiring would also be temporarily less expensive. The Social Security “trust fund” would be temporarily affected, but withholding a few months worth of FICA contributions is a drop in the bucket compared with the much larger issue of long-term adequate Social Security funding.

It is easy to accept that we live in a world of second best choices, but there is no reason to settle for third or fourth best.

Charles Blum