The Fed Understands the Romer/Sumner Tax Cut Argument (Too Bad Congress is Brain Dead.)

Christina Romer and I have both advocated employer-side payroll tax cuts.  When nominal wages are sticky, that shifts the SRAS to the right, and boosts output if the Fed is targeting inflation.  On the other hand employee-side cuts boost AD, and may be ineffective if the Fed targets inflation.  What does the Fed itself think?

The central bank “is performing about as well as it can on both mandates” of price stability and full employment, Kocherlakota said. It needs help from non-monetary policies such as hiring subsidies to offset the uncertainty and adverse credit conditions that are keeping companies from adding jobs, he said.

But hiring subsidies will only work to boost jobs if the Fed eases monetary policy further, he told reporters later.

Asked if he will support more policy accommodation if lawmakers pass hiring subsidies, Kocherlakota said that such a response would be “appropriate” if subsidies put downward pressure on inflation, as he predicts they would.

Interestingly, his view that hiring subsidies are a key policy tool for boosting employment squares with a paper released Monday from the San Francisco Fed, whose chief is among the most dovish at the U.S. central bank.

The Fed gets it; both the doves and hawks understand the AS/AD model.  Too bad our Congress doesn’t understand, and keeps passing ineffective employee-side payroll tax cuts.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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