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Robert Reich was U.S. secretary of labor in the Clinton administration and is a former U.S. Trade Commissioner. He spoke with GEV editor Nathan Gardels on Dec. 17.

GLOBAL ECONOMIC VIEWPOINT: President Bush has installed a new economic team, but his policy remains the same: long-term upper-bracket tax cuts to stimulate investment. Since the U.S. and the world economy are in a downturn, is this the appropriate policy?

ROBERT REICH: No, the present Bush policy will have no impact on the impending downturn in the U.S. and world economy. What we need is a short-term stimulus.

It is clear that the U.S. Federal Reserve Board has run out of ammunition: 12 rate cuts in two years have left it with no further place to go. Yet, businesses are understandably reluctant to invest because there is overcapacity. In short, we have too much supply relative to overall demand.

The best and most direct way out of this dilemma is to put money immediately into the pockets of consumers. The easiest and most effective way to do that is to provide a temporary payroll tax cut. I'd recommend exemption of the first $20,000 of income from the payroll taxes for one year. The cost would be about $350 billion for that one year.

I would make it up after 2004 by freezing income taxes where they are on the top 2 percent earners of the U.S. population, thus repealing the Bush long-term tax cut.

GEV: Ironically it was the Democrats under Clinton who balanced the budget, and it is the Republicans again who have huge deficits. Should we worry about deficit spending?

REICH: Right now we shouldn't worry. John Maynard Keynes' ideas still have applicability when the Federal Reserve Board can no longer help. Fiscal policy -- tax cuts -- is then the only game in town. Deficit spending to get out of a recession is perfectly appropriate.

Democrats were rightfully concerned at the start of the 1990s when there were $300 billion deficits as far as the eye could see. Now we are in a different situation.

The overall structure of America's finances is much better. We need government deficits in order to make up for lack of demand on the part of consumers, business and exports.

The long-term supply-side tax cuts Bush has proposed have nothing whatever to do with getting out of the current doldrums. They are being pushed the same way ''trickle-down'' tax cuts were being pushed in the 1980s. And for the same reason: to get entrepreneurs and investors to feel more confident and innovative so the economy will grow.

It didn't work in the 1980s, and it won't work now.

Entrepreneurs and rich investors already have as much incentive as they possibly need. Tax cuts will only marginally affect that. What they need is consumers with cash in their pockets to buy what they produce.

That is why the left-of-center ''supply-side'' policies make sense, that is, to invest in job skills, public transit and health. Call this ''bubble-up'' economics. It empowers people to be more productive. It gives them a stake in economic growth. It is the only supply-side growth theory worth considering.

GEV: Won't all the new spending on homeland security and the possible war in Iraq stimulate the U.S. economy in the short term?

REICH: Not much of an effect for now. We are in a $10 trillion economy. And we are only talking in the neighborhood of new spending at around $80 billion. That is not going to break the bank. We are not yet in a guns or butter dilemma as we were during the later stages of the Vietnam War. Stagflation is not on the agenda because we have a lot of underutilized industrial capacity.

Of course, the story could change if we get bogged down in Iraq over the next couple of years. Then we might be looking at $150-200 billion costs. We're not there now.

GEV: How important is some Keynesian stimulation in the U.S. economy for the global economy?

REICH: It is critical. The ''great sucking sound'' we have all heard over the past two years is the American consumer pulling in imports from all over the world. Hopefully Germany will avoid deep recession, Japan will get back on its feet, and Chinese consumers will start importing even more -- but those are aspirations for the global economy. For the next year to 18 months, American consumers are the only game in town. And they are only going to do their part if they have more money in their pockets.

(c) 2002, Global Economic Viewpoint. Distributed by Tribune Media Services International.
For immediate release (Distributed 12/18/02)

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