The Fed's Response Is Too Tepid
Alan Greenspan is pushing on a wet noodle. The Fed has repeatedly cut interest rates since January and nothing's happened which means that we shouldn't expect this week's half percent rate cut to have much impact either. Even figuring in the normal time lag between a rate cut and response, the fact is this economy just isn't responding.
Luckily the car has two accelerators. If the Fed's monetary policy isn't enough, there's fiscal policy. This week, the president lent his support to a stimulus package of between $60 billion and $75 billion in the form of additional tax cuts and spending.
Now the good news is that the White House and Congress are no longer obsessing about saving the Social Security surplus or indulging in any other accounting fiction. The national economy is near or in a recession, and Washington understands that now is the time for government to spend more and tax less even if that means temporarily going into the red. The bad news is that neither the White House nor Congress is thinking big enough.
$60 billion to $75 billion isn't chicken feed, but when you consider the size of the entire $10 trillion national economy, it's pretty close to chicken feed, less than 1 percent. Even if all this $60 billion to $75 billion went directly into the pockets of average consumers, it still wouldn't be enough to get them into the shopping malls.
This past summer, before the horror of September 11th, Americans got a $40 billion tax rebate, but that $40 billion failed to boost consumer spending because it wasn't enough to overcome consumer worries about being deep in debt and possibly losing a job. These worries haven't gone away. In the wake of September 11th, they've only grown bigger.
Tax cuts for companies won't spur them to spend or invest because companies already have too much capacity on their hands. They won't spend or invest a penny more until they know that consumers are coming back. The $15 billion airline bailout is a case in point. The airlines didn't take the money and invest it. They turned around and announced they were firing 120,000 of their employees. Not exactly a way to boost consumer confidence.
There's no way to get consumers to spend unless they have a lot more reason to feel confident about the future. One way to improve confidence would be to cut their payroll taxes by a total of at least $100 billion over the next 12 calendar months. Couple that with an extension of unemployment insurance and health insurance totally another $50 billion so people know if they lose their jobs, they and their families won't be in deep trouble.
Whatever Washington does, the test is whether it makes average working people feel more confident about their futures. The president's proposed $60 billion to $75 billion, which includes tax breaks for business, is a start but it won't be enough.