Economist Walter Heller today urged a $30 billion payroll tax cut next year to fight inflation and recession simultaneously.
The former chairman of the Council of Economic Advisors under President Kennedy told the National Savings and Loan League that a tax cut of that size should be mad to offset the $30 billion drain caused by OPEC oil price increases. Restoring that amount to consumers' pockets would not be inflationary, he contended, because a payroll tax cut would directly increase take-home pay, thereby reducing the pressure for wage increases.
He said a tax cut would also reduce the costs of business. And coupled with significant increases in business write-offs, he predicted, the tax cut would increase incentive, investment and productivity over the long run.
Heller, who noted with a little sarcasm that when he was CEA chairman prices were going up at the rate of 1.2 percent a year, "not 1.2 percent a month." recognized that there is "unanimous sentiment now" in federal agencies against a tax cut and for waging all-out war against inflation.But he added that the odds still favor it in an election year.
He acknowledged his proposed tax cut would increase the deficit for the near term, but would avoid larger deficits two or three years from now. He warned that failure to take action could result in a deeper recession and cited the example of 1974-75.
For 11 months after the last recession began the Ford administration refused to admit it was more than a "sideways waffling" of the economy and so did nothing, Heller said. As a result the predicted balanced budget for fiscal 1975 turned into a $66 billion deficit. In today's dollars, the economist pointed out, that would mean a $105 billion deficit.
As Heller sees it, the current recession is less than half over. Commenting on Treasury Secretary William Miller's recent assertion to that effect," it's the easy half that's behind us; the tough half is ahead. Besides, I think the tough half is going to more like three fifths of it."
miller backed away from his prediction earlier this week.
Heller also criticized Miller's contention that we are now in a period of negative interest rates and that credit will be available for those persons with worthwhile "projects; i.e., not those speculating in housing, commodities or foreign exchange. Heller said, "it would be nice if we could have a monetary policy that distinguished between the good people and the bad. Unfortunately the rain falls on the just and the unjust alike."
Now a professor of economics at the University of Minnesota, Heller offered restrained support for the Oct. 6 actions of the Federal Reserve to tighten credit. Volcker, Carter and Miller he said "had no other choice, Otherwise the dollar would have taken a drubbing overseas."
On the other hand, Heller maintained that "Volckerization" or monetary policy alone could not break the back of hardcore inflation brought on by high wage demands coupled with low productivity. A tighter fiscal policy is also necessary.
The National Savings and Loan League, an organization of leading urban mortgage lenders, adopted what it termed an "action plan for the '80s which calls for gradual elimination of government regulations on the types of loans and services they can offer. Its major goals include increasing mortgage credit so that 70 percent of U.S. households (compared with 65 percent now) can own their own homes by 1989, increasing funds for rehabilitation, and increasing S&Ls' profitability so depositors can be paid a higher rate of interest on their savings. The league's position is similar to that reflected in a bill now before the Senate, except that the league would not set any timetable for phasing out rate ceilings.