An interest rate cut won't stop recession
TEXT OF COMMENTARY
Scott Jagow: Fed Chairman Ben Bernanke gave a speech in Germany yesterday. But he didn't say anything about interest rates.
The Fed meets Tuesday to decide what to do about them. But commentator Robert Reich says it doesn't really matter if the Fed drops interest rates.
Robert Reich: With the economy heading for recession, the question everyone's 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. Meanwhile, 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 rate cut can't prevent a recession, what can? Putting more money into Americans' 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 Republicans 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-middle 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 for them 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.
Jagow: Commentator Robert Reich is the former Labor Secretary under President Clinton. His new book is called "Supercapitalism."