Kuttner's article, "Why the economy isn't heeding Clinton's call" (Economic Viewpoint, July 26), arguing for an investment stimulus, necessitates comment. First, the Clinton plan to stimulate the economy through deficit reduction or lower interest rates is by itself erroneous, in that lower rates are in themselves a reflection of lower demand. It is no different than saying lower apple demand will reduce the price of apples. However, the lower price will not increase the consumption of apples.
Kuttner errs when he states real interest rates during the Great Depression were zero. From 1929 to 1933, the consumer price index fell by about 25%, about the same drop as the M1 money supply. The real rate of interest rose markedly, as borrowers were forced to repay with more expensive dollars. This, coupled with negative expectations concerning profitability, significantly inhibited investment.
Herbert M. Bernstein
Robert Kuttner's comments on why the economy is not heeding Clinton's call are interestingly perceptive.
The Clinton economic program is like a jockey who is reining in a fast horse. If you want to see the horse go, then adopt the 2% solution--the limit on increased government spending that was proposed for the Bush tax increase a couple of years ago, then dropped. As for the revenue side, slap on a gasoline tax now to take advantage of lower crude oil prices. If you want to hit the jackpot on revenue increments, pare the 28% capital-gains tax to 20% for the next calendar year, and let it rise 2% each year until it gets back to 28%.
Daniel A. Bruno