231-922-9460 | Google +

Tuesday, August 10, 2010

U.S. Economy Improving, More Stimulus Isn't the Answer, Rubin, O'Neill Say‏


Robert Rubin
The U.S. economy will improve slowly and another round of fiscal stimulus likely wouldn’t be effective, former Treasury secretaries Paul O’Neill and Robert Rubin said.

Rubin, who served under Democratic President Bill Clinton, said the U.S. is “going to have slow and bumpy growth,” in a taped interview on CNN’s “Fareed Zakaria GPS” scheduled to air today. A “major second stimulus” might create uncertainty and undermine confidence, he said.

Companies are concerned about demand and won’t expand facilities and hire new employees until sales have improved, said O’Neill, who was Treasury secretary under Republican President George W. Bush.

“I think we are moving forward at a pretty gradual pace,” O’Neill said. “But I don’t think things are terrible.”

The world’s largest economy may be cooling in the second half of the year as a scarcity of jobs limits consumer spending. U.S. companies in July hired fewer workers than forecast, and economists in a Bloomberg News survey project the unemployment rate will be slow to recede after reaching a 26-year high of 10.1 percent in October 2009.

O’Neill, currently a senior adviser and consultant to New York-based Blackstone Group LP, said Democratic President Barack Obama could “make a huge difference” if he advocated tax overhaul, particularly something “simple” such as a value- added tax.

Bush Tax Cuts

The Obama administration has said it wants to let the Bush administration tax cuts expire for households earning more than $250,000 a year, while maintaining reductions for households earning less than that. The tax cuts, enacted in 2001 and 2003, expire on Dec. 31.

Treasury Secretary Timothy F. Geithner has said the government can’t afford to extend the reductions for the wealthiest Americans, as the tax breaks don’t pay for themselves in economic growth. Geithner, in a speech in Washington on Aug. 5, dismissed the “long-discredited idea” that tax cuts generate enough growth-related income to offset their fiscal impact, and said there is “absolutely no evidence to support it.”

Rubin said he’d immediately create an estate tax, increase taxes for upper-income Americans, leave in place the current middle-class tax rates “for a limited period” and try “over the next six months to put in place a very serious beginning of deficit reduction that would take effect at some specified time in the future.”

Vulnerable Economy

Rubin urged delaying the elimination of tax cuts on the middle class because of the “vulnerability” of the economy and the high unemployment rate.

The economy grew at a slower-than-projected 2.4 percent pace in the second quarter as consumer spending slowed and the trade deficit widened, government data showed on July 30.

Private payrolls that exclude government agencies rose by 71,000 in July after a June gain of 31,000 that was smaller than previously reported, according to Labor Department figures released in Washington Aug 6. Overall employment fell by 131,000, reflecting the dismissal of temporary census workers, and the jobless rate held at 9.5 percent.

The Clinton presidency, when 22.8 million jobs were created, “was a remarkable period” and the president “was terrific on economic policy,” Rubin said. The country is in a much different position now, he said in response to a question about how the U.S. could create jobs more rapidly.

Complex Issues

“Obama has done a lot, given the current circumstances in which he has been operating,” Rubin said. “But he now faces these enormously complex issues,” and “I think we’ve all got to try to find some way to help make the system work better.”

The weak July payrolls report intensified a debate among economists over whether Federal Reserve policy makers will take an incremental step this week toward providing more stimulus. U.S. central bankers said in June that additional monetary stimulus “might become appropriate” if the economic outlook “were to worsen appreciably.”

Federal Reserve Chairman Ben S. Bernanke last month said the central bank is prepared to take further policy actions if the economy “doesn’t continue to improve.” Bernanke said last month the Fed may at some point maintain stimulus by investing the proceeds from maturing bonds into U.S. Treasuries.