Cut Interest Rates, Not Taxes

The President's instincts to stonewall rising pressure from Congress for a quick-fix tax cut are 100% correct. True, tax cuts have been used effectively to kick-start the economy out of recession -- but this is no ordinary downturn. Cuts would do more harm than good, raising hob with the deficit, exacerbating our trade balance because of consumers' propensity to buy imports, and occurring too late to do much stimulating before mid-1992 at the earliest. This is a recession unlike any other, because the economy is held back by a larger set of long-term structural problems. It will take years to address the recalcitrant budget deficit, chronically poor productivity growth, a crumbling infrastructure, the job squeeze from restructuring in industries from banking to retailing, the low savings rate and record burden of debt, and the glut of commercial real estate. These long-run problems require long-run solutions.

That's why the off-the-shelf remedy for cyclical recessions, tax cuts for the consumer, won't work. It makes much more sense to rely on a low-inflation, low-interest-rate environment to stimulate long-term investment throughout the economy. The Federal Reserve still holds the key.

The central bank must continue to lower interest rates until spending starts up again. This is no time for business as usual at the Fed. Because of the large spread between what banks pay for money and what they lend it for, the Fed need not fear pushing the discount rate and the Fed funds rate even lower. It's important to get the rates at which real businesses and home buyers borrow money down even further. There are other steps the Fed can take to make banks lend more. It could pay interest on reserves, the billions of dollars banks must keep on deposit with the Fed. Also, it could act to push down long rates, which would stimulate housing and other long-term investments.

A sweeping program of public investment to rebuild the nation's tattered infrastructure is a fiscal policy option. Public investment yields benefits for the long term as well as the short. And one advantage of public investment is that it enhances productivity, one of the economy's gravest long-term problems.

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