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the political signals indicate that the White House and Congress
are on a collision course that will produce a "bipartisan Bush-Daschle"
economic stimulus plan. This is likely to be a plan that doesn't
do much good for the economy at a time when the economic indicators
are mixed at best. The economy could use a tax-cut lift — one
that is about twice as large as what even the Republicans are seeking.
The recent
encouraging news on retail sales and the recent improvement in the
stock market can't hide some of the more depressing signs of economic
weakness. First, more than two million jobs have been lost since
the start of the year. And second, thanks to deflationary monetary
policy and tax drag, the U.S has lost $300 billion in output this
year.
Even the recent
rise in the Dow Jones has only recaptured a tiny portion of the
losses absorbed over the past 20 months. The destruction of asset
values is roughly $5 trillion, or almost $100,000 in lost wealth
on average for every investor-class household in America.
Investment is almost at a standstill. The venture capital industry
has fallen by 70% this year; the IPO market is dormant; business
capital investment is at its lowest level since the last recession.
The source of the U.S. downturn is investment, not consumption.
All of this is to say that the need for a significant tax-cut rescue
plan has taken on added importance over recent weeks. The White
House is hoping and praying that the 10 Federal Reserve Board interest-rate
cuts and the modest Bush tax cut enacted earlier this year will
revive growth. The administration may be right. But it is sensible
to dramatically raise the odds of a full-force recovery in 2002
with a big and bold supply-side tax-cut package now.
Here are the steps that are needed to make that happen:
1. Ditch the Bush-Daschle compromise route: it's an economic
dead end. Any bipartisan stimulus bill that meets with the approval
of Messrs Daschle and Gephardt will not provide much, if any, benefit
to the ailing economy. The Democrat's version of a recovery plan
could hardly do more damage to the U.S. economy if it were designed
by Osama bin Laden himself. The Democratic plan would devote almost
3 of every 4 new dollars in stimulus to additional government social
and infrastructure spending. And it would fund the new spending
by raising the top income-tax rate in the future. A real growth-enhancing
stimulus plan will never gain the approval of left-wing Democrats
like Daschle and Gephardt. So don't go there.
2. Think big: double the stimulus price tag to jump start
growth. The current plan is for a stimulus plan of $75 billion to
$100 billion. Given the size of the crisis we face at home and abroad,
this is puny — less than 1% of GDP. Even accounting for the
tax cut already enacted, the new tax cuts would amount to less than
2% of GDP. The Reagan tax cuts, which ended the mini-depression
of 1978-82, were 4 to 5% of GDP. This is the magnitude of tax cuts
Republicans in Congress should now be considering.
3. A capital-gains tax cut is a necessity and it's virtually
free. A prospective capital-gains cut from 20% to 10% would raise
asset values (thus helping the stock market), stimulate investment,
and help 75 million investor-class Americans. Best of all: the cost
of this tax cut would be close to zero. In 1997 the rate reduction
from 28% to 20% led to a 70% increase in capital-gains tax receipts
(from $62 billion to $109 billion) and the largest explosion in
venture-capital funding (from 1997-2000) in American history. A
forward-looking capital-gains tax cut (applying only to gains after
September 11, 2001) would lose at most $25 billion. The economy
gets $10 of growth for every $1 in revenue cost. This is the very
definition of a "stimulus." The price tag is less than
the ill-designed corporate tax rebate in the House bill.
4. Government spending won't generate economic growth or
jobs: just ask Japan. Among all industrialized nations, Japan has
by far the largest increase in public-sector spending over the past
decade. The entire island has been cemented over with public works
projects. Japan is now building bridges and tunnels as it begins
to pave over the ocean with concrete. The demand-side formula has
only deepened the depression. The Nikeii index, which stood at near
40,000 in 1990, is now at below 15,000. Japan now has its highest
unemployment rate since World War II. This is hardly an economic
recovery model for the U.S. to emulate. Don't go there, either.
5. Temporary tax cuts are nearly worthless. Temporary tax
cuts shift the timing of economic activity, but not the overall
level of economic activity. Some 70% of the House tax bill expires
after 2002 and 90% expires after 2003. This will surely accelerate
economic activity now (taxes impact behavior, after all), but will
depress economic activity the moment the stimulus wears off. Temporary
business-investment tax breaks, temporary sales-tax holidays, and
temporary tax-rate cuts could unwittingly prolong the recession,
rather than end it. If the tax cut is worth doing, it is worth doing
permanently.
Now is not
the time for pinching pennies. A tax cut of $200 billion to $300
billion a year is affordable and necessary to get America back to
work. The two top priorities for Congress should be to accelerate
the top income-tax rate cuts in the Bush plan and cut the capital-gains
tax in half.
Without a GOP
victory on at least one of these two priorities, the stimulus bill
will have almost no noticeable effect on growth. A stimulus bill
that mostly expands government spending will actually depress the
economy and is worse than no stimulus plan at all. Democrats, who
are looking to take back Congress in 2002 may be content to settle
for that outcome. Republicans have everything to lose — including
their jobs — if they settle on a stimulus bill that won't stimulate.
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