Title: Fiscal Policy For the Coming Recession: Large Tax Cuts are Needed to Prevent a Hard Landing
Abstract: In this note we present a case for implementing stimulative policy rather than interest rate reductions by the Fed. We conclude that those who oppose the use of policy may not appreciate the strength of the forces moving the U.S. economy toward recession. Further, we fear that relying solely on monetary policy this early in the downturn will virtually ensure a severe recession. Finally, we evaluate President Bush's tax cut plan and conclude that it is too small to stimulate the economy enough to prevent a recession. We estimate that the required stimulus is on the order of at least $450 billion annually, which would shift the federal budget stance from a surplus of more than 2 percent of GDP to a deficit of 2.5 percent of GDP. We explain why a budget deficit is economically sound at this time, and why attempts to maintain fiscal discipline and a budget surplus are particularly dangerous in this first year of the new millennium. In light of our analysis, we propose a tax cut package that is likely to provide the stimulus needed to cushion the downturn. If this discretionary adjustment to the existing policy stance is not made, the federal budget will automatically move t o deficit as economic growth turns negative, household income falls, and unemployment explodes to double digits, because tax revenues will automatically fall and spending on unemployment compensation and other social programs (welfare, crime, food stamps) will rise.
Publication Year: 2001
Publication Date: 2001-01-01
Language: en
Type: article
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Cited By Count: 6
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