LETTER TO FRANKLIN J. VARGO FROM DICK PABST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000303010001-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: November 30, 2009
• Sequence Number: 1
• Publication Date: April 1, 1985
• Content Type: LETTER

Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85T01058R000303010001-9
Central Intelligence Agency
Mr. Franklin J. Vargo
Deputy Assistant Secretary for Europe
US Department of Commerce
301
1 April 1985
Dear Mr. Vargo:
1. As you requested, we have undertaken a number of
economic simulations starting in mid-1985 on the West European
countries to determine the impact of various policy alternatives
1 on growth and other key economic variables. Attached are seven
tables, each with the results of a specific simulation for
`Western Europe, and the other major countries.
2. Some key highlights and conclusions are the following:
-- Tax cuts (personal income or business) are the most
effective means to raise growth. Simulations using the
money supply or interest rate as the policy variable
produced no meaningful results for growth; in both cases
the results directly impacted on prices and exchange
rates. Our model, the Linked Policy Impact Model,
produces results on an annual basis and cannot,
therefore, easily take into account any real effects that
quarterly models may capture.
-- Tax cuts implemented by all West European countries to
raise growth by two percentage points has the largest but
not a dramatic impact on lowering unemployment; the 1.7
percentage point decline in 1987 from the baseline
probably translates at most into a point decline in the
current rate. At the same time, however, the
deterioration in budget and current account balances is
rather severe (Table 1).
Tax cuts aimed at raising growth by only a percentage
EUR M 85-10111
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 point appear tolerable in terms of their impact on budget
deficits and current accounts, but unemployment winds up
only 0.9 percentage point lower than the baseline; this
would probably be enough to just stabilize the current
unemployment rate (Table 2).
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-- The "locomotive" simulations whereby only the Big-4
stimulate (Tables 3, 4, and 5) produce similar results to
the European-wide stimulation, but the burden also falls
heavily on the Big-4; budget and current account
deterioration is strong in West Germany, France and the
UK, though the type of tax change affects each country
differently.
-- A West German-UK stimulation package is not greatly
different from the Big-4 results. Unemployment ends up
0.6 percentage point below the baseline instead of 0.8;
government and current account balances are also only
slightly more affected (Table 6). The last simulation,
whereby West Germany and the UK implement tax cuts in
mid-1985 (The UK cut is twice the announced figure of
$800 million, and the West German cut of $7.6 billion is
now scheduled for 1986 and 1988) produces meaningful
results only for West Germany, where the unemployment
rate drops by almost a percentage point below the
baseline.
3. Please feel free to contact me 25X1
if we can be of further assistance. 25X1
Enclosure: as stated
Sincerely,
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 Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85TO1058R000303010001-9
Simulation 1: All West European Countries Raise Growth
I% o Percentage Points By Cuts in Personal Inane Tax Rates
Real GDP Growth
Government Budget
Unemployment
Inflation
Current Ac
t
coun
Balance as
Rate
Rate: CPI
Balance
Percentage of GDP
($ i-billion)
1985
1986 1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
19
87
United States
0.1
0.1 0.1
0.0
0.1
0.2
0.0
-0.1
-0.1
0.0
0.1
0.2
1.4
4.5
9.0
Canada
0.2
0.3 0.3
0.1
0.3
0.5
0.0
-0.1
-0.2
0.1
0.3
0.6
0.2
0.6
1.3
Japan
0.2
0.4 0.6
0.0
0.1
0.2
0.0
0.0
0.0
0.0
0.1
0.2
1.0
3.0
6.3
West Germany
1.0
2.0 2.0
-1.1
-1.5
-2.0
-0.4
-1.2
-2.1
-1.1
-1.5
-1.5
-2.8
-8.4
-14.2
France
1.0
2.0 2.0
-0.6
--0.2
-0.8
-0.6
-1.5
-2.8
-2.6
-0.8
-3.6
-0.7
-2.7
-5.3
United Kingdom
1.0
2.0 2.0
-0.9
-2.2
-3.9
-0.3
-0.9
-1.7
-0.5
-1.4
-1.9
-1.9
-6.3
-10.7
Italy
1.0
2.0 2.0
-0.2
0.8
2.3
-0.2
-0.8
-1.5
-0.8
-0.7
-0.5
0.0
-0.5
-0.9
Smaller Developed
Countries
1.0
2.0 2.0
-0.5
-0.5
-0.6
0.0
-0.4
-0.9
0.1
0.7
0.6
0.5
0.1
-1.6
Western Europe
1.0
2.0 2.0
-0.7
-0.7
-0.9
-0.3
-0.9
-1.7
-1.0
-0.5
-1.2
-5.0
-17.7
-32.6
0.5
0.9 0.9
-0.2
-0.2
-0.3
-0.1
-0.4
-0.8
-0.3
0.0
-0.3
-2.4
-9.6
-16.2
* Unless otherwise indicated, all data are percentage point changes from baseline.
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Table 2
Simulation 2: All West European Countries Raise Growth
One Percentage Point By Cuts in Personal Income Tax Rates
Real GDP Growth
Gov
d
t
ernmen
Bu
get Unemployment
Inflation
Current A
t
ccoun
Balance as Rate
Rate: CPI
Balance
Percentage of GDP
($ 1-b 11 T1oon)
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1
987
United States
0.0
0.1
0.1
0.0
0.1
0.1
0.0
0.0
-0.1
0.0
0.0
0.1
0.8
2.4
4.7
Canada
0.1
0.2
0.2
0.1
0.1
0.2
0.0
0.0
-0.1
0.0
0.2
0.3
0.1
0.3
0.7
Japan
0.1
0.2
0.3
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.5
1.5
3.1
West Germany
0.5
1.0
1.0
-0.5
-0.8
-1.0
-0.2
-0.6
-1.0
-0.5
-0.7
-0.7
-1.4
-4.1
-7.0
France
0.5
1.0
1.0
-0.3
-0.1
-0.4
-0.3
-0.7
-1.4
-1.3
-0.3
-1.9
-0.4
-1.3
-2.6
United Kingdom
0.5
1.0
1.0
-0.4
-1.1
-2.0
-0.1
-0.5
-0.9
-0.3
-0.7
-1.0
-0.9
-3.1
-5.3
Italy
0.5
1.0
1.0
-0.1
0.5
1.3
-0.1
-0.4
-0.7
-0.4
-0.4
-0.3
0.1
-0.1
-0.3
Smaller Developed
Countries
0.5
1.0
1.0
-0.3
-0.3
-0.3
0.0
-0.2
-0.5
0.1
0.3
0.3
0.3
0.1
-0.8
Western Europe
0.5
1.0
1.0
-0.3
-0.4
-0.5
-0.1
-0.4
-0.9
-0.5
-0.3
-0.6
-2.4
-8.6
-16.0
OECD
0.2
0.5
0.5
-0.1
-0.1
-0.2
-0.1
-0.2
-0.4
-0.2
0.0
-0.1
-0.9
-4.4
-7.7
* Unless otherwise indicated, all data are percentage point changes from baseline.
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 Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85T01058R000303010001-9
Table 3
Simulation 4: Big Four West European Countries Raise Growth
One Percentage Point By Cuts in Personal Inane Tax Rates
Real GDP G
th
row
Government Budget Unemployment
Inflation
Current Account
Balance as Rate
Rate: CPI
Balance
Percentage of GDP
($ i76 llioon)
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
United States
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.7
2.0
3.9
Canada
0.1
0.1
0.1
0.0
0.1
0.2
0.0
0.0
-0.1
0.0
0.1
0.2
0.1
0.3
0.6
Japan
0.1
0.1
0.2
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.4
1.2
2.6
West Germany
0.5
1.0
1.0
-0.6
-1.1
-1.6
-0.2
-0.7
-1.2
-0.6
-1.0
-1.1
-1.7
-5.2
-9.3
France
0.5
1.0
1.0
-0.4
-0.1
-0.5
-0.3
-0.8
-1.4
-1.5
-0.4
-2.1
-0.5
-1.8
-3.8
United Kingdan
0.5
1.0
1.0
-0.5
-1.3
-2.4
-0.1
-0.5
-0.9
-0.3
-0.8
-1.2
-1.0
-3.4
-6.0
Italy
0.5
1.0
1.0
-0.1
0.4
1.1
-0.1
-0.4
-0.7
-0.5
-0.5
-0.5
0.1
-0.3
-0.8
Smaller Developed
Countries
0.2
0.3
0.3
0.1
0.4
0.6
0.0
-0.1
-0.1
0.1
0.2
0.2
1.7
4.9
9.0
Western Europe
0.4
0.8
0.8
-0.2
-0.2
-0.4
-0.1
-0.4
-0.8
-0.5
-0.4
-0.8
-1.7
-6.4
-11.7
O BM
0.2
0.3
0.3
-0.1
-0.1
-0.1
-0.1
-0.2
-0.3
-0.2
-0.1
-0.3
-0.3
-2.3
-3.8
* Unless otherwise indicated, all data are percentage point changes fran baseline.
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 Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85T01058R000303010001-9
Table 4
Simulation 5: Big Four West European Countries Raise Growth
One Percentage Point By Equal Combination of Cuts in*Personal
Inane Tax Rates and Cuts in Business Taxes
Real GDP G
th
o
w
r
Government Budget Unemployment
Inflation
Current Account
Balance as Rate
Rate: CPI
Balance
Percentage of GDP
($
iil ion)
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
United States
0.0
0.1
0.1
0.0
0.1
0.1
0.0
0.0
-0.1
0.0
0.0
0.1
0.8
2.4
4.5
Canada
0.1
0.1
0.1
0.0
0.1
0.2
0.0
0.0
-0.1
0.0
0.1
0.3
0.1
0.3
0.6
Japan
0.1
0.2
0.2
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.3
1.1
2.4
West Germany
0.5
1.0
1.0
-0.3
-0.5
-0.4
-0.1
-0.2
-0.4
0.1
0.3
0.4
-1.8
-5.9
-10.4
France
0.5
1.0
1.0
-0.8
-2.0
-2.9
-0.2
-0.6
-0.9
0.1
0.5
0.9
-0.5
-1.9
-3.6
United Kingdom
0.5
1.0
1.0
-0.4
-1.2
-2.2
-0.1
-0.4
-0.8
0.1
0.4
0.7
-1.6
-5.1
-9.0
Italy
0.5
1.0
1.0
0.1
0.8
1.9
-0.1
-0.4
-0.8
0.1
0.2
0.1
-0.2
-0.7
-1.2
Smaller Developed
Countries
0.1
0.3
0.2
0.1
0.2
0.4
0.0
0.0
-0.1
0.2
0.4
0.4
1.7
4.8
7.6
Western Europe
0.4
0.8
0.8
-0.2
-0.3
-0.3
-0.1
-0.3
-0.5
0.1
0.4
0.5
-2.6
-9.3
-17.4
OECD
0.2
0.4
0.3
-0.1
-0.1
-0.1
0.0
-0.1
-0.2
0.1
0.3
0.4
-1.2
-5.1
-9.1
* Unless otherwise indicated, all data are percentage point changes from baseline.
25X1
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 Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85TO1058R000303010001-9
Table 5
S3mulaticn 3: Big Four West European Countries Raise Growth
One Percentage Point By Equal Canbination of Cuts in Pers9nal
Inane Tax Rates and Increases in Government Spending
Real GDP Growth
Government Budget Unemployment
Inflation
Current Account
Balance as Rate
Rate: CPI
Balance
Percentage of GDP
($-Pi 11rn)
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
United States
0.0
0.1
0.1
0.0
0.1
0.1
0.0
0.0
-0.1
0.0
0.0
0.1
0.8
2.4
4.6
Canada
0.1
0.2
0.2
0,0
0.1
0.2
0.0
0.0
-0.1
0.0
0.1
0.3
0.1
0.3
0.7
Japan
0.1
0.2
0.3
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.4
1.4
2.8
West Germany
0.5
1.0
1.0
-0.4
-0.6
-0.8
-0.1
-0.4
-0.7
-0.2
-0.3
-0.2
-1.9
-5.8
-10.1
France
0.5
1.0
1.0
-0.3
-0.7
-1.5
-0.2
-0.7
-1.2
-0.5
0.1
0.1
-0.6
-2.1
-4.1
United Kingdan
0.5
1.0
1.0
-0.3
-0.9
-1.6
-0.1
-0.5
-0.8
-0.1
-0.1
0.1
-1.4
-4.6
-8.1
Italy
0.5
1.0
1.0
0.2
1.1
2.3
-0.1
-0.4
-0.8
0.0
0.3
0.3
-0.1
-0.6
-1.1
Smaller Developed
Countries
0.1
0.3
0.2
0.1
0.2
0.4
0.0
0.0
-0.1
0.2
0.4
0.4
1.8
4.9
7.8
Western Europe
0.4
0.8
0.8
-0.1
-0.1
-0.1
-0.1
-0.3
-0.6
-0.1
0.2
0.2
-2.3
-8.7
-16.3
0.2
0.4
0.3
0.0
0.0
0.0
0.0
-0.2
-0.3
0.0
0.2
0.2
-0.8
-4.1
-7.4
* Unless otherwise indicated, all data are percentage point changes from baseline.
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 Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85T01058R000303010001-9
Table 6
Simulation 6: The United Kingdan and West Germany Raise growth
One Percentage Point By Cuts in Personal Income Tax Rates
Real GDP Growth Government Budget Unemployment inflation Current Account
Balance as Rate Rate: CPI Balance
Percentage o GDP ($ b f i"on)
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
United States
0.0
0.1
0.0
0.0
0.0
0.1
0.0
0.0
-0.1
0.0
0.0
0.1
0.5
1.8
3.8
Canada
0.1
0.1
0.1
0.0
0.1
0.2
0.0
0.0
-0.1
0.1
0.2
0.3
0.1
0.3
0.6
Japan
0.1
0.2
0.2
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.5
1.5
2.9
West Germany
0.5
1.0
1.0
-0.1
-1.6
-2.3
-0.3
-0.8
-1.5
-0.8
-1.3
1.6
-2.3
-6.8
-11.8
France
0.2
0.5
0.6
0.1
0.3
0.7
0.0
-0.2
-0.4
-0.1
0.0
0.1
0.5
0.9
1.3
United Kingdom
0.5
1.0
1.0
-0.5
-1.4
-2.5
-0.1
-0.5
-0.9
-0.3
-0.9
-1.3
-1.2
-3.8
-6.6
Italy
0.2
0.6
0.8
0.2
0.9
1.9
-0.1
-0.2
-0.5
0.1
0.1
0.2
0.2
0.4
0.5
Smaller Developed
Countries
0.1
0.2
0.2
0.1
0.2
0.4
0.0
0.0
-0.1
0.2
0.4
0.4
1.6
4.1
7.0
Western Europe
0.3
0.7
0.7
-0.2
-0.2
-0.3
-0.1
-0.3
-0.6
-0.1
-0.1
-0.1
-1.4
-5.6
-10.3
OECD
0.1
0.3
0.3
-0.1
-0.1
-0.1
0.0
-0.1
-0.3
0.0
0.0
0.0
-0.2
-1.7
-2.3
* Unless otherwise indicated, all data are percentage point changes from baseline.
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 Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85TO1058R000303010001-9
Table 7
Sl .aticn 7: The United Kingdlim and West Gem M Advance
Tax Cuts Planned for 1985 and 1987
R
l G
h
ea
DP Growt
Government Budget Unemployment
Inflation
Current Account
Bake as Rate
Rate:
Balance
Percentage of GDP
($ i-6 11-icn)
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
1985
1986
1987
United States
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.3
1.1
2.0
Canada
0.0
0.1
0.1
0.0
0.1
0.1
0.0
0.0
0.0
0.0
0.1
0.2
0.1
0.2
0.3
Japan
0.1
0.1
0.1
0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.3
1.0
1.6
West Germany
0.4
0.7
0.4
-0.7
-1.3
-1.3
-0.2
-0.6
-0.9
-0.6
-1.0
-0.7
-1.7
-5.3
-7.5
France
0.1
0.4
0.3
0.1
0.2
0.4
0.0
-0.2
-0.3
-0.1
-0.1
0.1
0.3
0.5
0.4
United Kingdcxn
0.3
0.4
0.2
-0.2
-0.5
-0.6
-0.1
-0.2
-0.3
-0.2
-0.3
-0.2
-0,6
-1.5
-1.6
Italy
0.2
0.4
0.4
0.1
0.6
1.1
0.0
-0.1
-0.3
0.0
0.1
0.1
0.1
0.2
0.3
Smaller Developed
Countries
0.1
0.2
0.0
0.0
0.1
0.2
0.0
0.0
0.0
0.1
0.3
0.2.
1.1
2.7
3.5
Western Europe
0.2
0.4
0.2
-0.1
-0.2
-0.1
-0.1
-0.2
-0.4
-0.1
-0.1
0.0
-1.0
-3.6
-5.3
OECD
0.1
0.2
0.1
0.0
-0.1
0.0
0.0
-0.1
-0.1
0.0
0.0
0.0
-0.2
-1.0
-0.9
* Unless otherwise indicated,. all data are percentage point changes from baseline.
Sanitized Copy Approved for Release 2009/11/30: CIA-RDP85TO1058R000303010001-9