Use-Me: A Modest Proposal To Avoid Global Secular Economic Stagnation

A guest post by Benjamin Cole

Well, if a Martin Wolf can call for permanent QE by all Western governments, and if a John Cochrane can suggest the U.S. Federal Reserve should completely liquidate the U.S. national debt, than I guess my USE-ME program is worth trotting out as well. I mean anything goes these days, no?

Universal Solution Extraordinaire for Modern Economies (USE-ME)

In a nutshell, at least in the United States, it goes like this: Cancel all payroll taxes, and have the central bank print up the money and put it into the Social Security and Medicare trust funds.

Oh, I know, the right way to do that is to have the U.S. Treasury issue bonds, and then the Fed buys the bonds, through the QE program. Then Treasury puts the Fed-money into the Social Security trust fund. Okay, keep the charades if that helps.

Deflationary Stimulus?

I do have a worry and this is that USE-ME will cause too much deflation.


Payroll taxes (also called “FICA taxes” for Federal Insurance and Contributions Act) are huge deal in the American workforce, big wedge between worker and employer, and major disincentive to both.

The U.S. government levies now about $1 trillion a year in FICA-payroll taxes.

And the FICA taxes fall most heavily upon “ordinary” businesses and employees. That is not left-wing blah-blah, it is an indisputable fact. The FICA taxes apply only to the first $113,700 of wages, and are now 15.3 percent, split between employer and employee.

So, what happens when the cost of employment suddenly falls 15.3 percent for most employers, under my USE-ME scheme?

If we assume some competition in the American economy, such large labor cost reductions will be deflationary, although they will be the so-called “good” deflation rhapsodized by many who are obsessed with price indices. Call them supply-side tax cuts.

The worry comes from this: Unit labor costs have been flat in the U.S. for a long time; about up 1 percent a year since 2000. Thus, a 15.3 percent cut in labor costs would likely deflate unit labor bills for a long time. With deflation in labor costs, it is hard to forecast any inflation in the U.S., no?

Really Pour on The QE

Of course, the U.S. hardly experiences any inflation now, what with the PCE deflator running at 1.6 percent and falling, well below the Fed’s putative 2 percent target.

The USE-ME payroll tax cuts in combination with already-wimp inflation would require the Fed to show steely resolve in the printing of more money, just to reach its 2 percent target, let alone make it an average.

My back of the envelope guess is that under USE-ME the Fed would have to buy perhaps $85 billion in Treasury bonds a month—which happens to be exactly enough to offset the lost FICA tax revenues, and keep the Social Security-Medicare system full to the brim.

If after USE-ME the Fed still does not hit the 2 percent inflation target, then Fed Chief Yellen would have to up the ante, and pay down the national debt too, ala John Cochrane. Maybe also buy another couple hundred billion of Treasuries every year.

Prosperity Will Be Tough

I concede, it will take some time and extended prosperity to get inflation back up to the 2 percent average target, if the U.S. implements USE-ME, but I think Americans can take it.

My guess is the U.S. GDP will have to expand by up to 20 percent in real terms, maybe as it did from 1976 through 1979—back when there was no Internet, less foreign trade and the top MTR was 70 percent. And did I mention capital is abundant now, but wasn’t then?

Under USE-ME, we will endure a swelling workforce, and new investment in plant and equipment to handle the strong sales. The robust U.S. economy may strengthen the dollar, another deflationary side-effect, and that may require even more QE. There will be no relief for the Fed, not for years. The Fed printing plants will be in the red zone 24/7.

There is a long road ahead under my USE-ME plan, of higher labor participation rates, higher per capita incomes, and even higher corporate profits, as we pay down the national debt.


“I have nothing to offer you but blood, toil, sweat and tears, ” said Winston Churchill, master wordsmith in a time and place that needed both.

And so I paraphrase.

“I have nothing to offer you, but Fat City.”


5 thoughts on “Use-Me: A Modest Proposal To Avoid Global Secular Economic Stagnation

  1. Hi Benjamin. Just a first impression:

    “Okay, keep the charades if that helps.”

    Yeah, I think it might help.

    Anyway, it shows that the required policy infrastructure already exists. We CAN create more money IF we think we need it. The problem is not that we need a way to do it. The problem is that the dominant minority — policymakers, I mean — think it would not be a good thing to do.

  2. The Arthurian!

    Nice to hear from you again. Yes, the sad part is you are right, the FOMC has no clue of their potential for good. BTW, David Beckworth has opined before on a combo QE-tax cuts approach, but I think I have the best method with payroll tax cuts.

    In my life, I think this is the best idea I ever had, in terms of making life better for lots of people.

    I think USE-ME might work. The risk would be inflation, but jeez, the risk of NOT doing USE-ME might be secular stagnation.

    In fact, looking at Japan, Europe, the Fed should be shaking in its boots—not about inflation, but stagnation.

    At least Plosser and Fisher are headed of the exits. That’s too bad, Fisher and his speeches provided constant fodder for lampooning.

  3. This USE-ME program is better than nothing. But I view it as a compromise for those who don’t particularly care about the allocation of resources. I’d prefer wild and wooly, unbridled-capitalism stoking QE until the printing presses suffer multiple meltdowns… and then do it again. 🙂

  4. Dajeeps: Thank you for your comments. Seems like a lot of QE gets stuck in the banks, ergo tax cuts for workers and employers. Anyway that’s my idea.

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