- The Washington Times - Tuesday, November 29, 2011


Our jobs crisis has reached a fever pitch. The “newest” job-creation strategies represent “old wine in new bottles.” They have not been successful in creating jobs before, so what makes anyone think they will now? Policymakers appear to be groping for something - anything - that seems to be a viable job-creation strategy. However, what we really need is something bold.

Fortunately, such a strategy, QE3-ST (Quantitative Easing 3-Sales Tax), has been getting media attention and merits further investigation. It involves the Federal Reserve increasing the money supply an additional time - something that is being called for anyway (QE3). However, instead of purchasing long-term Treasury bonds with the newly created money in order to reduce long-term interest rates, which many economists think are low enough already, distribute it among states and municipalities for the purpose of reducing their sales-tax rates. Since consumer spending drives about 70 percent of the U.S. economy, and businesses create jobs when demand for their products increase, QE3-ST will result in robust job creation, since the lower sales-tax rates made possible will encourage greater consumer spending. Unlike the garden-variety income-tax cuts, QE3-ST provides tax cuts only to the individuals who are the most effective job creators of all - those who spend.

These tax cuts will benefit the poor and the middle class to a greater extent than the rich. They should be the dream job-creation strategy for Republicans, who continue to reel from accusations they only care about the rich.

QE3-ST inappropriately mixes fiscal and monetary policy actions and will require legislation for its implementation. The autonomy of the Federal Reserve will be compromised for the first time. Yes, this is unsettling, but isn’t this strategy preferable to those that have already been tried and failed, in addition to another one gaining in popularity - surrendering and hoping our abysmal jobs situation will improve on its own?

In retrospect, a QE3-ST-type strategy should have been unveiled years ago. Earlier rounds of money-supply increases resulted in a great deal of liquidity sitting on the sidelines, doing nothing. Consumers would have put it to much more productive uses - increasing consumption and creating jobs.

Many are understandably nervous about ratcheting the money supply upward yet again. This will send the value of the U.S. dollar even lower and increase the risk of inflation. There is a solution: Modify “Operation Twist” by taking the funds from the maturing short-term Treasuries held by the Federal Reserve and routing them toward states and municipalities to underwrite reductions in their sales-tax rates - “Operation Twist-ST,” or “Operation TwiST.” The objectives of QE3-ST will be realized without increasing the money supply, although its job-creation impact will not be quite as great.

Given the unprecedented nature of mixing fiscal- and monetary-policy actions, perhaps it would be best to give it a trial run in a region of the United States where the sales-tax burden is especially onerous, such as Long Island, N.Y., or where the unemployment rate is especially high, such as Nevada.

There are numerous issues connected with any QE3-ST-style strategy requiring a thorough fleshing out. How long should it be in place? Ideally, long enough to trigger the type of buoyed consumer and business confidence that can put our economy on a more sustained growth trajectory. This is “priming the pump” 2011-style. Since QE3-ST and Operation TwiST focus on encouraging increased consumption of smaller-ticket items, rather than houses, which was the focus of QE2, it has a much better chance of succeeding. In poor economic times, it should be easier to sell someone a stove than a house.

Another important issue is what to do about states and municipalities that have no sales taxes. I wasn’t sure until I spoke to a good friend, Bob Semonian, a Massachusetts Republican State Committee member, who suggested a great idea: Provide a subsidy to the consumer that is some percentage of his purchase, a negative sales tax.

Certainly, QE3-ST and Operation TwiST have loose ends and unanswered questions. In an environment where policymakers are running out of options and others have already surrendered, it is clear that this new generation of job-creation strategies merits further investigation.

Edward T. Gullason is professor of economics at Dowling College and was a staff economist with President Reagan’s Council of Economic Advisers.



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