We have a problem. The Federal Reserve has lowered interest rates as far as they can go. The specter of rising oil and food prices limit how much quantitative easing the Federal Reserve is willing to do. The Administration has already produced one stimulus package of debatable effectiveness.

If the economy doesn’t turn around in the third or fourth quarter what is our plan B plan G?

Many commentators won’t like the answer. It reminds them of guy from Crawford whom they are none to fond of. It reminds them of the bad old days.

The answer is swift, aggressive, pervasive tax cuts. My baseline recommendation: a one year suspension of the payroll tax. Its big. Its expensive and its likely to be controversial.

First, a few details. Rather than simply “cut” the payroll tax for one year, it probably make more sense for the Treasury to pay each taxpayers payroll tax for one year. This gets around the problem of employees potentially loosing credit against retirement benefits for the year. It gets around the problem of messing with Social Security and Medicare trust funds.

It makes it clear that the itself Treasury is taking on this burden. If this has to be done as some sort of rebate or tax credit then that is fine, so long as it goes into the pockets of businesses and consumers immediately.

Second, the cost will be large, somewhere in the neighborhood of $900 Billion. That means a deficit well in excess of $2 Trillion this year and perhaps approaching the $2 Trillion mark next year.

The principle advantage of tax cuts, however, is that we don’t have to worry as much about where the money goes. We would like to think the employer side cut will do larger to retaining workers. We would hope that the employee side cut goes to spending.

However, in either case the funds will either be spent or they will be saved. If they are spent we have stimulus. What they’re spent on influences how powerful the stimulus will be but there is likely to be some stimulus.

If the tax cuts are saved this isn’t ideal, but its not the end of the world either. The net savings position of the US does not change when tax cuts are saved. The US government is in deeper debt, but US consumers are in less debt.

For reasons I’ve listed before, however, I think that the fear that consumers will save their tax cuts is probably overblown.