Tax cuts needed in world economy

Insight on the News, Nov 26, 2002 by Jamie Dettmer

Will the Fed's action help in boosting the economy? Skeptics think not, arguing that as an instrument of impact monetary policy now may be exhausted. A major change in fiscal policy, both in the United States and in Europe, is the only thing that will make a difference, they argue.

One economic-consulting outfit, Global Insight Inc., argues in a study that strong coordinated fiscal action, including tax cuts, is needed in combination with moves on interest rates among industrialized nations. Global Insight maintains that risks of stagnation and deflation outweigh inflation worries and that under the circumstances inaction is highly dangerous.

But getting concerted action from the Group of Seven leading industrialized nations has proved elusive in the last 18 months, and little leadership has been shown from Washington. In many European countries, including Germany, rigid labor markets governed by outmoded regulations are preventing the kind of economic flexibility that could boost growth.

As in the United States, European companies are struggling to shore up profits by cutting costs, including labor.

ABN Amro Holding NV said last week that it is reducing costs at its French private-banking business. And German lenders have announced more than 40,000 job cuts since the start of last year. An index based on a survey of purchasing managers, compiled by NTC Research for the Reuters Group, showed expectations for the future fell to 58.9--the lowest in almost a year--from 64.5 the previous month. Other service industries are in trouble, including travel, leisure and entertainment. Services account for about 60 percent of the region's economy.

JAMIE DETTMER IS A SENIOR EDITOR FOR Insight.