Tax Cuts Are the Government's Only Viable Option

The biggest problem in the U.S. economy isn't that businesses don't have enough money or that they can't get credit. Sales are the problem. That has been made clear over the past several months by large corporations hoarding cash rather than expanding and by listening to what small businesses are saying. American consumers simply aren't comfortable spending freely at this time, with so much uncertain about the future. Unfortunately, there's no easy path for the government to take in order to solve this problem. It stems from there being essentially three sorts of people in the U.S., which the government will have trouble satisfying simultaneously to raise confidence.

Group 1: The Skeptics

Some Americans believe that the government's actions to help the economy through stimulus measures, no matter how well-intentioned, will just screw things up worse. They point to the stimulus as an awful lot of spending with weak results, as best. The only way to make them more confident would be for the government to commit to doing nothing. In fact, this group of people might be pleased if the Congress cuts spending. Of course, that would likely cost jobs, which would raise already high unemployment, economy's most painful open sore.

Group 2: The Believers

The next group of Americans wants more government involvement. They would be thrilled if the government was more aggressive, favoring measures like infrastructure spending and housing market stabilization efforts. They might also be encouraged if the Federal Reserve were to employ even more aggressive techniques than it already has to expand monetary policy. Washington should do whatever it possibly can to fix the economy, says this group.

Group 3: The Disinterested

Finally, there are those who don't really care. If this group isn't spending, nothing the government does either way will help much. They don't care about politics. Some people in this group find it all a waste of time and believe that the government's actions don't significantly affect the economy. Others simply don't pay much attention to politics, feeling like it doesn't affect their lives. Consequently, the government is powerless to sway this group's sentiment on the economy.

Are Consumer-Targeted Tax Cuts the Only Answer?

So what can the government do to satisfy all three groups? Unfortunately, there's no perfect policy that possibly can make everyone happy. Obviously lawmakers can't do much to affect Group 3. And any direction they take will likely anger either Group 1 or Group 2, both of which are pretty large. If Congress passes additional spending measures, then Group 1 will feel even worse about the economy. If it does nothing, then Group 2's sentiment will plummet.

The only policy technique that has a shot is tax cuts -- specifically cuts on the consumer side, since that would target the weak demand affecting businesses. But some in Group 1 will worry about the affect on the deficit, so it would likely have to be offset with spending cuts to make them all happy, which could mean job losses on in federal and/or state governments.

Several thousand more job losses could be worth it, however. Tax cuts could result in Group 2 feeling that this stimulus will help and Group 1 feeling better about future economic prospects as the government pulls back. Even Group 3 might spend more, since those in this segment will have more money in their pockets.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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