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Sir,

A ‘Payroll Tax Holiday’ as a follow up the ‘Troubled Asset Relief Programme’ (TARP).

I agree with Tim Congdon’s “Harsh arithmetic behind the banking crisis” (The Times, 2nd October, 2008). However, while the TARP may marginally improve asset prices, it does not directly address interbank liquidity nor aggregate demand.

While the Fed has relaxed collateral requirements, at this late stage, it needs to simply lend unsecured to its member banks to normalize bank liquidity.

To support aggregate demand- an even more pressing need- Congress can declare a ‘payroll tax holiday’ and reduce social security and medicare payroll deduction rates to zero, until aggregate demand is sufficiently restored. This would immediately end the current crisis via the ‘trickle up’ process of increasing take home pay for workers who can then make their mortgage payments, pay their bills, and sustain the domestic demand needed to support the US as well as the Euro economy.

Remaining issues include the increased demand for energy consumption as the world economy recovers, and associated price pressures, which are a separate matters.

Yours faithfully,

Warren Mosler
Senior Associate Fellow, Cambridge Centre for Economic and Public Policy
University of Cambridge; Chairman Valance Co.
5000 Estate Southgate, Christiansted, St. Croix, USVI 00820


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