The public focus is on the military action in Afghanistan, but we must not neglect the very real problem of economic recession.
If the United States is to avoid a recession as long and deep as that of the 1930s, both monetary and fiscal stimuli must be undertaken immediately, as matters apart from, but obviously affected by, conducting the war on terrorism.
Monetary policy should continue to reduce interest rates so that the cost of borrowing does not exceed the nominal return on investment, an old policy that still works. The average nominal return on investment in the group of the United States, Japan and the European area for the year ended in the second quarter of 2001 was 2.7 percent. The rate for the United States next year is expected to be lower. The threat of inflation from too loose monetary policy is less of a problem than that of deflation. Just ask Japan.
Short- And Long-Term Solutions
Four short-term and one longer-term fiscal steps should also be considered immediately.
A short-term step that has worked well in the past is:
– A 10 percent income tax credit for investment in capital items and tools , effective this time through Dec. 31, 2002, and broadened to include real property improvements and software.
Three newer short-term steps to seriously consider are:
– A 10 percent income tax credit through Dec. 31, 2002, for new employee hires that increase staff, based on Sept. 30, 2001, employment tax returns;
– A federal reimbursement to the states, counties and cities for sales tax reductions through Dec. 31, 2002, as suggested by Princeton University economist Alan Blinder, to increase consumer purchases now;
– A 50 percent reduction through Dec. 31, 2003, in both employee and employer payroll taxes. This gets dollars to spend now into the hands of both employees and business. It will temporarily reduce the theoretical funding of Social Security but, historically, these dollars are really spent as part of the national budget anyway. The idea of a “lock box” is only a recent political hoax.
The longer-term step would be:
– A 10-year federal program allocating $50 billion annually to rebuild our crumbling infrastructure, hopefully including high-speed train facilities where feasible to relieve our clogged freeways.
Deficits Not The Problem
These fiscal steps will result in federal deficits, but our federal debt is nowhere near a problem level, and a long, severe recession will be a very big problem that may result in even greater deficits and fewer dollars available to deal with the future excess of Social Security expenditures over payroll taxes.
These matters cannot be put aside as the war on terrorism captures the headlines, news and talk shows. We need a strong economy to successfully pursue this war.
We need some or all of these fiscal incentives now for companies and individuals to get money into circulation and we need the loosened monetary policy to make money available to them to spend if we are to promptly recover from the recession that is already here.
Miller, a California CPA and certified specialist in taxation law, has been practicing for more than 40 years. He is a partner with Miller, Monson, Peshel, Polacek & Hoshaw.
