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Larry Summers to Alan Blinder to Paul Krugman to Laura Tyson, all
the liberal economists oppose George W.
Bush's tax cuts. Instead, they want Alan Greenspan to fix the broken
Clinton economy by pumping up the money supply. Sort of a Keynesian
version of monetarism: Let the government planners at the Fed take
charge, not those crazy-assed Laffer Curve supply siders.
I takes too long to implement tax cuts, the liberals tell us. Congress
will never pass them in time to fight recession. And anyway, big
tax cuts will bring back those awful Reagan deficits that gave us
the worst economy since the Depression. (Those awful Reagan tax
cuts, by the way, turned 15 years of stagflation into 4% economic
growth, generating more than 20 million new jobs with falling inflation
and interest rates along the way.)
But the liberals have one thing right. The Bush tax-cut plan will
be the political issue of the new millennium. It's good that
the battle lines are being drawn. It will be hammer and tongs, good
vs. evil, light vs. darkness. If W. folds on this one, both he and
the Republican party will go down — faster than water cascading
down a mountain. 2004 will be a disaster.
"For Bush, genetically, it's a huge deal to keep his promise," supply-side
founder Arthur Laffer told me. "He cannot compromise one inch."
In a perverse way, it may be just as well that the economy and the
stock market are tanking at the end of Clinton's watch. This sets
the stage for the tax-cut battle royale.
Little Gene Sperling, a Clinton economic adviser, tried hard to
pin the downturn on Bush by accusing the Texan of talking down the
economy and thus damaging confidence. Nice try Gene. But Alan Greenspan
just blew Sperling and his goofy argument right out of the water.
The Fed completely turned tail and reversed course by acknowledging
that recession, not inflation, is the big U.S. economic problem.
They took the nearly unprecedented move of dropping their key Fed-funds
policy target rate by one-half of a percentage point in between
the regularly scheduled Fed meetings. So, even Greenspan admits
that the Clinton prosperity is over.
Their whole budget-surplus model of economic growth has fallen apart
— not that it had much legs anyway. Huge surpluses were built
on record personal tax payments, and this transfer of resources
from private hands to government coffers has created fiscal drag
that badly undermined economic growth. Meanwhile, as after-tax incomes
slumped, personal saving has collapsed. Add to that the energy shock,
itself a function of the Clinton failure to deal with OPEC from
strength, and the economy has been weighed down even more.
Clintonian regulation of the high-tech frontier, including the attack
on Microsoft, and the spate of midnight regulations imposed by executive
decree in the last days of the Clinton White House, have also played
a negative role. The regulations impose huge business costs that
— if left unturned — would continue to pull down profits
and growth, Carterlike, as far as the eye can see. In sum, the Clinton
policies of rising tax burdens, high interest rates and re-regulation
is responsible for the sinking stock market and the slumping economy.
It's a good thing that the Fed has finally come to their senses
that the root-canal policy of liquidity deflation was doing great
harm to the technology-driven prosperity wave. However, while the
Fed can produce more money, they cannot produce more goods or investment
or risk taking. Those supply factors can only be generated through
private-sector enterprise. But it must pay — after-tax —
to work, produce, invest and take risks. What the sagging economy
needs is a fresh round of economic reward incentives to replace
lost purchasing power from the cycle of tax-bracket creep that is
punishing successful wage earners.
Many years ago, supply-sider Laffer taught us that if something
is taxed we get less of it. But if we tax things less, we get more
of it. The most efficient and fair way of reducing tax burdens is
precisely the sort of across-the-board reduction in marginal tax
rates offered by President-elect Bush. What's more, economic recovery
will come faster through tax cuts than through monetary pump priming.
If, for example, Washington could button down a big tax-cut package
by spring, and make the tax cuts retroactive to January 1, then
the IRS will immediately lower withholding rates, and after-tax
take-home pay for work and investment purposes would rise immediately.
The full effect of monetary stimulus, however, will take at least
six months, and might even extend to 18 months, depending how quickly
the Fed expands the monetary base and persuades people not to defer
spending decisions until lower financing costs kick in.
Remember, inflation is defined as too much money chasing too few
goods — a process that devalues the currency and taxes the
buying power of money. If high marginal tax rates depress the output
of goods, and the Fed floods the economy with new money, we will
be left with the same stagflation that occurred in the 1970s when
liberal Keynesian thinkers in both political parties were dominant.
If, on the other hand, lower tax rates are implemented at the same
time the Fed loosens money, then individuals will have the necessary
liquidity to put new economic incentives to work. More rapid growth
will absorb the money supply and non-inflationary prosperity will
resume. Lower tax rates to stimulate growth and greater liquidity
to prevent deflation is exactly the right policy mix.
If Mr. Bush is of a mind to adjust his tax plan, he should include
a drop in the corporate tax rate, which will allow business to produce
and invest at a greater pace. But any shrinkage of the tax plan
will have serious economic and political consequences. Too clever-by-one
ideas, such as dropping the bottom rate from 15% to 10% this year
and deferring to next year the top-rate reduction to 33% from 40%,
would be an economic and political defeat of the first rank.
So far, Bush has held firm on his tax plan. And key Democrats such
as Richard Gephardt are now moving in his direction. The political
force is with Bush. He carried three-fifths of the states and 78%
of the counties in the recent election, thereby giving him more
political clout in Congress than nearly all political observers
recognize. If Bush stands tall in the saddle in the next few weeks
and months, he will not only revive the economy, but he will also
lay the groundwork for a huge Republican sweep in 2002 and 2004.
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