Monday, September 20, 2010

Roubini Says Fed Is Out of Ammo, What U.S. Needs Is A Payroll Tax Cut

Ubiquitous Noriel Roubini wrote an article on the Washington Post in which he says that the U.S. needs a payroll tax cut. He reiterates that the chances of a double-dip recession have increased from from "unlikely" to about a "40%"

He also had some praise for the government, which created TARP, Troubled Assets Relief Program, stimulus spending and zero interest rates for nearly two years and managed to prevent a second Great Depression. So far, we should say!

However, as we know, the Fed has little ammunition left. In addition, Roubini says that federal deficit is so high that further stimulus is unwise.

Roubini claims that a better option is for the administration to reduce the payroll tax for two years.

"The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less -- and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do".

"[...] A tiny percentage of the highest-income Americans will pay more for the service the government rendered to their brokerage firms and investment banks in 2008. In exchange, a large tax break can be fashioned for employers and employees that jump-starts consumption, encourages hiring and thereby reduces the risk of a double dip without busting the budget".

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