Robert Reich Uses the R Word

Robert Reich’s latest post, “The Way to Prevent the Looming Recession.” argues that monetary policy won’t prevent the coming recession and therefore policy makers need to consider tax cuts:

With the economy heading for recession, all eyes are on Ben Bernanke and the Fed, and the question everyone is asking is how much the Fed will cut short-term interest rates to stimulate the economy. But a Fed rate cut won’t stimulate the economy. That’s because lending institutions, fearing their portfolios are far riskier than they assumed several months ago, won’t lend lots more just because the Fed lowers interest rates.

Average consumers are already so deep in debt — record levels of mortgage debt, bank debt, and credit-card debt — they can’t borrow much more, anyway. With average home prices dropping faster than they’ve dropped since the Great Depression, many can’t even refinance. And given last Friday’s report showing the first employment drop in four years, people are not in the mood to keep spending.

So if a Fed rate cut can’t prevent a recession, what can? Putting more money into American pockets by cutting their taxes. Yes, I know: Tax cuts have gone out of style ever since Democrats became born-again deficit hawks, and George Bush squandered the $5 trillion surplus he inherited in 2000 mainly by cutting taxes on the rich.

But with a recession looming, Democrats need to stop being the party of Herbert Hoover economics. And the Republican need to understand tax cuts for the rich won’t help because the rich don’t increase their spending when their taxes are cut. They already spend as much as they want to spend. That’s what it means to be rich.

It’s middle and lower-income Americans who spend more when their taxes are cut. And because the biggest tax they face is the payroll tax, the payroll tax needs to be cut in order to keep them spending and avoid a recession.

I say exempt the first $15,000 of earnings from payroll taxes for a year, starting as soon as possible. Sure, this may cause the budget deficit to widen a bit. But if the economy goes into the tank, the deficit will be far bigger.

Now just because Reich is simplistic and alarmist doesn’t mean that what he says is completely without merit (I attribute the broad brush style to his desire to reach a mass audience)

First, a recession seems highly likely, which means actions taken now probably won’t forestall one. And we may well see a bona fide recession (meaning two quarters of negative growth) but knowing how stats get tinkered with, don’t be surprised if we have low positive growth quarters later revised into negative territory.

Second, a recession isn’t the end of the world (we seem to have developed the same aversion to recessions that we have to wars that involve the loss of American lives. Numbers that were once routine are now unacceptable). But it’s possible that we could go into a deep recession that merits concerted action. In other words, it’s still worth having remedies in mind, but delay pulling the trigger until the trajectory is clear.

Third, Reich is likely correct that monetary policy will be ineffective. If, as Harvard’s Mohamed El-Erian pointed out, 17 interest rate increases didn’t slow the economy, why should cuts be any more successful? A big focus of discussion at the Fed’s recent conference at Jackson Hole was that we are having a crisis that is outside the banking system, but the Fed’s tools are all designed to address problems within the banking sector.

Fourth, if things get really bad, policy makers will need to look at fiscal remedies (even Nouriel Roubini has been advancing that view). Tax cuts, including the type Reich suggests, are an option.

Finally, however, I am disappointed that most commentators focus on monetary and/or fiscal fixes, and comparatively few are thinking seriously about the need to devise new financial regulations. That’s an integral part of any solution, one that takes considerable thought, and yet is getting the least attention.

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  1. a

    Given that the cause of many of the economic imbalances in the world is a result of the American consumer spending too much and far beyond his means, I abhor this knee-jerk reaction that the solution of our problems will be – to keep the American consumer spending.

  2. Yves Smith


    I don’t disagree. That’s why I am not as averse to a recession as most people are. Unfortunately, excesses need to be wrung out of the system.

    I’m just saying if we have a deep, prolonged recession, which I think is quite possible (we could go into the worst downcycle since the big D), then more radical measures will need to be considered.

    It’s stating the obvious, but our huge budget deficit makes fiscal stimulus a less attractive route than it would otherwise be.

  3. Anonymous

    As I’ve mentioned before, I think the US doesn’t have the “brains” nor the willpower to get out out the worsening trouble. Until Dems grow a spine and say that regulation is justified and deregulation is what got the US into this mess, otherwise they’re pandering to the business community for campaign donations.

    We actually need an opposition party in this country.

    Robert Reich has never impressed me much since being Clinton’s Sec of Labor. The more I see of him, the less I like.

    Robert Reich and the Elimination of Corporate Criminal Liability


  4. capitalist socialist

    Yves and a,

    You are both quite right with your opinions.
    Let me proffer a third option.
    Much against the grain of what Big time businesses and Wall Street would like to hear. Is the need for growth sacrosant in all business and economic objectives ? A video (CNNMoney)interview of Mr Jim Kilts, former CEO of Gillette, a great US icon, talkng about being honest and having integrity in business, about stopping “trade loading’ and not to force unrealistic expectations in corporate objectives worth a mention.
    What’s so bad about a deflation for the US ?
    During the tenure under Greenspan, growth was fueled by high octane, easy monetary policy abetted by lackadaisical fiancial regulations of Wall Street and their accomplices. Growth was falsified and unsustainable, never mind about what your statistics ,what the IMF and all those clever analysts and big names, reputation biased CEOs in Wall Street says about the growth that you got. It was simply unreal – cooked up by Wall Street to justify volatility. Wall Street needs a lot of manufactured news to create volatility – that’s their gravvy on the plate!
    Deflation hurts but there is ray of hope – Government needs to tax wealth more to generate off budget provisions to deal with the unemployed and social unrests. The wealth effect did not trickle down fast enough under “free market” economics – that’s why the share of the growth pie is a mirage for the middle to lower income group of Joes and Sallies. An equilibrium of wealth distribution needs to be restored above all else, before economic growth can become meaningful. You don’t need a Nobel Laureate in Economics to tell, the US economy is in dire need of wide ranging policy redressing.

  5. minka

    The free market anti-regulation ideologues have their fangs in our neck. They have for decades. There is no rational discourse on regulation in this country.

    This ideology flows out of think tanks funded with right wing money. It’s an aspect of corporate dominance not only of American political life and ideas, but of our sense of reality.

    That is why I think this can only end in disaster. Iraq shows how ideology and reality can fight with chaotic and terrible results. Of course I’m not asserting that America will be ‘like’ Iraq. But there will be a showdown between reality on the ground and greed inspired economic fantasies of free market, ‘anti-regulation’.

    It is only from the utter failure of these always stupid ideologies – through the suffering of millions – that a sense of reality will be restored.

  6. Erich

    I don’t know if a reduction in payroll tax would help the economy, I would be happy just to see the discussion switch from the horrors of the inheritance tax to the regressiveness of the payroll tax.

  7. Anonymous

    Hmm… Funny how the liberal media and liberals in general went on and on and on and on and on and on and on and on…like stuck PIGS before the 2000 election about the use of the “R” word. Look it up. You were not even allowed to utter the word. They had talk show after talk show about Dick Cheney saying that “we always prepare for a recession”. He didn’t even say there WILL be or we are going into a recssion like Clinton and Obama. The idea of a recession, of course, hurts an incumbent. A thought not lost on the lib media types. In fact they said that the use of the “R” word is what causes a recession. They said it over and over and over and over again (look it up if your claiming liberal amnesia.). In fact, me even metioning this fact, in a liberal mind, is totaly out of control(freedom of speach only applies to liberals and liberals alone, in their minds). Bush was handed a recession. Note how the Media will not mention when the last recession was.They will talk about every other date but this one seems to elude the “news”.It dosn’t fit the lib temp-plate so it won’t be mentioned. Check it out yourself. Don’t take it from me.Watch the brain dead media at work.They know who their talking to and they also know they can get away with it. Liberals will never look into anything like that. Facts and such.
    Bush was handed a recession.
    Do any of you Libs know what the stock market was doing as of January 21, 2001 (the begining of time for most liberals)? Look it up.
    I love the idea that were running a deficet because of “tax breaks for the rich”. Tax revenues have gone up to record highs, not down. It works every time it’s tried. . It’s the spending, with the approval of Bush (whom I blame), thats caused the deficits.
    Lib media and their “Experts” have been telling us we “will be in a recession” in 2003, 2004, 2005, 2006,2007 (of course their still “experts” in the eyes of a lib.) and now 2008. Even a broken clock is correct twice a day.
    Sorry. I must go to the soup line now, being the Great Deppression and all.

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