US Federal Reserve actions not tax cuts will block US recession

President-elect Bush has made a good case for a tax cut. U.S. taxes are too high, and certain features of the tax code, such as the marriage penalty, need to be fixed. But some experts believe a tax cut wouldn't come in time to blunt the effects of a
recession. That falls to the Federal Reserve.

As opposed to a tax cut, which must be reviewed by economists at the Treasury Department, then moved through a divided Congress, Fed actions are swift (as has been shown by the surprise 0,5 percent interest rate cut announced by Alan Greenspan after this article was first published).

  • The Federal Reserve can cut interest rates and expand the money supply almost instantaneously.

  • The Federal Open Market Committee meets every six weeks to review economic conditions and take action if necessary.

  • No congressional debate is required.

  • By comparison, even if the Bush tax cut were pushed through the Congress quickly and made retroactive, the U.S. would probably be past the slowdown by the time it had an impact.

    In fact, legislative response to recessions doesn't have an impressive track record. In all seven post-war recessions, Congress did not pass legislation in response to the downturn until after it had ended. For example, in May 1977, Congress was still passing legislation to deal with the recession that ended in March 1975.

    Source: Bruce Bartlett (NCPA), What Tax Cuts Can't Do, New York Times, December 20, 2000.

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