Roubini: The Only Way To Prevent A Double Dip Is To Cut Payroll Taxes And Raise Taxes On The Rich


Nouriel Roubini now believes that there is a 40% chance of a double dip recession.

Yet while he speaks of a good doom game, he’s also offering an ounce of hope with his latest tax proposal.

Basically, the Fed’s out of ammo and the U.S. deficit is exploding. Thus any attempt to stimulate the economy, which he believes is of utmost necessity given the high chance of a double dip, must be deficit-neutral.

So here’s his surprisingly simple proposal — Let the Bush tax cuts expire only for those earning $250,000 or more… and then use the savings to deliver a temporary payroll tax cut for all Americans.

Washington Post: [Emphasis added]

A much better option is for the administration to reduce the payroll tax for two years. The reduced labour costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidise the demand for capital rather than the demand for labour. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 per cent. The argument that increased demand for capital leads to greater demand for labour (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less — and lower labour costs. To avoid a chronic increase in the unemployment rate, we need to subsidise the demand for labour — achieving job creation — rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners — the vast majority of Americans — would remain in place for the time being.

If the maths works out as Roubini says, this seems like one of the most politically-digestible plans out there, almost bullet proof it seems. (Though we invite people to disagree) You can read Mr. Roubini’s full proposal here.

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