sent 27 January 2001
Re: "Economic Realities Drove Greenspan," Washington Post, 26 January 2001.

To The Editor:

There is a growing recognition that the economic boom of the 1990s has morphed into the first recession of the new millennium. Even Chairman Greenspan recognizes that GDP growth has fallen to zero ("Economic Realities Drove Greenspan," Washington Post, 26 January). President Bush, rightly, proposes to accelerate the phase-in of his tax cuts in an effort to cushion the downturn. Ironically, while Democrats fight to preserve "fiscal discipline", Chairman Greenspan provided luke-warm endorsement of the President's plan. He argued that the economy can now "afford" significant tax cuts because the surpluses projected over the next decade will total over $5.5 trillion. While most of his support was couched in highly technical terms, he did recognize that some fiscal stimulus is desirable. With his blessing, Congress should be able to reach some compromise that will cut taxes.

The questions that remain, however, concern how to cut taxes, and how much to cut. Unfortunately, policy makers do not appear to understand the magnitude of the required fiscal adjustment. Our private sector (households plus firms) has been running deficits equal to 6.5% of GDP. Indeed, given the fiscal stance of the federal budget (in conjunction with a trade deficit), economic growth is possible only if the private sector spends in excess of its income. As private spenders bring spending back into line with their incomes, this will create a huge demand gap-probably on the order of 4 or 5 percent of GDP. Thus, the size of the fiscal adjustment needed is perhaps $450 billion per year-or at least three times larger than anything President Bush is likely to propose. Note, also, that budget surpluses are projected to continue even as the economy slows, indicating that the budget is structurally imbalanced toward surpluses. Thus, while the President's proposal to cut marginal tax rates is a good start, additional tax cuts of about $300 billion per year will be required. We suggest a tax refund of $500 per taxpayer, retroactive to tax year 2000 and to last through tax year 2002 (for a total of nearly $90 billion annually); plus an immediate payroll tax cut of $150 billion annually (shared equally by employers and employees); and assorted other tax credits for educational expenses, child care, and low income earners to total $60 billion annually. These adjustments would put the federal budget back on an economically sound basis such that surpluses would be achieved only when the economy is growing robustly.

Warren Mosler
Principal, AVM LP
250 S. Australian Avenue, Suite 600
West Palm Beach, Fl 33401

L. Randall Wray
Professor and Senior Research Associate
Center for Full Employment and Price Stability
5100 Rockhill Road
University of Missouri
Kansas City, MO 64110