An editorial in today's Wall Street Journal suggests that if we really are interested in staving off a recession, we should stop cutting interest rates and start cutting taxes:
Even if you expect a recession, relying on the Fed as savior is a mistake. Monetary policy is only one economic policy lever, and it has to be used with care. The other, better tool is fiscal policy -- specifically a tax cut. On present Washington course, we are falling back into the 1970s' policy mix of easy money amid tax increases. Whenever the economy slowed in the 1970s, everyone clamored for the Fed to ease. The result was ever shorter recoveries amid steadily rising prices.
The better policy mix is the one implemented by Ronald Reagan and Paul Volcker that broke stagflation in the 1980s. The Fed restored dollar credibility and avoided asset bubbles, while tax cuts spurred incentives to work and invest. Even on Keynesian grounds, a tax cut now makes sense if you're worried that the housing recession will slow consumer spending. An across the board tax cut on marginal personal and corporate income tax rates would also attract capital from around the world, increase the demand for dollars, and thus make the Fed's job easier.
We realize it's heresy to suggest a tax cut in today's Beltway, but we were outliers in the 1970s too. Sooner or later, investors and Wall Street will both rediscover that easy money has its limitations. The smart Presidential candidate will be the one who starts talking about a tax cut before everyone else.
With the weakness of the economy increasingly becoming a significant concern for voters, this is an issue begging for a strong voice to emerge from the contenders for the White House in 2008. It seems like an opportune time for Romney to call for tax cuts now and cap off the trifecta (his speech last week and yesterday's National Review endorsement).
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