NCPA - National Center for Policy Analysis

A Tax Cut Could Head Off A Global Recession

December 9, 1998

Former Federal Reserve Governor Lawrence Lindsey has joined George Shultz in calling for an immediate 10 percent across-the- board tax cut to head off a domestic economic slowdown which could trigger a worldwide recession. He contends such a move would put about $70 billion in the pockets of consumers. That would maintain consumption growth and personal savings.

Lindsey says economic expansion is now showing clear signs of being both unbalanced and overextended. A significant slowdown in the U.S. leading to a global recession would hinder efforts to make the world more democratic and market-oriented.

Here are a few of the points Lindsey makes:

  • The greatest cause for worry is the slowdown in the personal savings rate -- which collapsed from 5.7 percent in 1992 to 0.1 percent in the third quarter of 1998.
  • If that pattern continues over the next three years, with people spending more than they make, consumption will continue to grow, but the savings rate will reach negative 4.5 percent in 2001 and households will have added about $720 billion in debt by 2002.
  • If households stop at a zero saving rate, spending all that they make but no more, gross domestic product growth will slow by about 1.25 percent -- which will have serious consequences for the world economy.
  • Moreover, nonfinancial corporations are no longer able to cover their capital expenditures from internal funds -- making cutbacks likely, which could take almost a full percentage point off growth.

Insurance against such a slowdown can be found in an easier monetary policy or an easier fiscal policy, Lindsey contends. Easier money is a risky option since it would likely create a stock-market bubble.

A 10 percent tax cut, on the other hand, would maintain consumption growth without forcing personal savings any lower -- and provide the world with some needed economic insurance.

Source: Lawrence Lindsey, "The Best Insurance Against Global Recession," Wall Street Journal, December 9, 1998.

 

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