It’s Time for Uncle Sam to Put People to Work--and Spur the Economy

It seems as though one can’t pick up a newspaper nowadays without reading about one company or another announcing a sizable cut in its payrolls. These layoffs have generally followed the release of a disappointing earnings report.

Welcome to the corporate version of musical chairs, as each company tries to bolster its earnings at the expense of others. This has produced a vicious cycle: Mass firings have depressed people’s confidence, which has cut their spending, which has held down sales and earnings, which prompts more layoffs!

Don’t look to monetary policy to be of much help. The Federal Reserve has cut short-term interest rates in half during the past two years, but to no avail.

In this low-confidence environment, you could drive interest rates down to zero; if people are afraid of losing their jobs, they’re not going to borrow to buy a big-ticket, postponable item such as a car or a house. For its part, business won’t borrow, either, if it sees only dim prospects for sales.

Those who do try to borrow are many times unable to do so, as the banks, hobbled by loan losses, unusually strict examination and capital standards, ration loans.

Economic scholars are calling this the 1990s version of the 1930s “liquidity trap,” which was advanced by the great economist John Maynard Keynes as justification for the need for fiscal stimulus in times like these.

As Keynes pointed out, you can pull on a string, but you can’t push on it. In other words--tight money can slow an overheated economy, but easier money alone may not necessarily revive it.

To break the vicious cycle that threatens to stall the nascent recovery, we must have a fiscal shot in the arm. Specifically, the government must assume the role of employer of last resort.

We need to increase public investment in roads, bridges, water and sewer systems. Our crumbling infrastructure demands no less.

By putting people back to work, and money in their pockets, we can simultaneously address the twin problems of lack of confidence and depressed spending. Any time an unemployed person finds a job, he or she naturally feels better. And every dollar a previously unemployed person earns will probably all be spent and then some, as deferred needs are addressed.

Such a program will have tremendous ripple effects. For although this would begin as a public program, most of the money spent would flow through the private sector, because the government doesn’t make steel, cement or wire cables.

This would provide an immediate lift to many businesses, which, in turn, would then proceed to hire people, who would have more to spend, and so forth. While we’re at it, let’s be sure to extend the time the unemployed can receive jobless benefits.

But spending is only one blade of the fiscal shears. Tax cuts are necessary also to inject purchasing power into the hands of the vast majority of people who would not be immediately affected by this increase in government spending.

First, cut Social Security taxes--the biggest tax the average household pays. Restore the deductibility of interest and taxes for individuals, and you might encourage additional borrowing and spending.

Repeal the luxury tax. This has turned out to be more harmful to those who build the fancy cars, private planes and yachts than to would-be buyers.

Help business overcome its lack of confidence by making it cheaper to invest in people, equipment and even physical plant. Cut the capital gains tax and restore the investment tax credit.

These were the key provisions of the Tax Act of 1986, which effectively killed the real estate market, so why not go all the way and repeal this statute, thus enhancing the value of many properties?

Help real estate and you help the banks, but to make sure, the bank examiners must be told to treat real estate loans more reasonably. Higher capital requirements should be delayed. The banks should be allowed to diversify their product lines and to expand across state lines.

Will the government’s fiscal actions widen an already swollen budget deficit? You bet they will--and don’t fall for any plan that claims to be deficit neutral, for it won’t do the job. As big as it is, the deficit will have to be widened even more, so that it can be narrowed later on, once growth (and tax revenue) picks up.

The time to have reduced the budget deficit by spending restraint and/or tax hikes is long past; it will come again once the economy strengthens.

Meanwhile, fiscal stimulus is just about all we’ve got left to boost the economy. Let’s use it now--and avoid more misery.