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 ax cuts don't affect
people's behavior, yet are powerful enough to cause recessions even
before they're enacted. That appears to be the economic theory Tom
Daschle is advancing as he tries to make the case that President
Bush's tax cut is responsible for layoffs, diminishing surpluses,
the underfunding of national priorities, and probably flu season.
The leader of the Senate Democrats outlined his economic views in
a speech on January 4.
Yet nobody
disputes that the economy started weakening before Bush took office
and officially went into recession before he passed his tax cut.
The recession is the primary reason that projections of this year's
surplus are being revised downward — possibly to zero or below.
That's not the fault of the tax cut, which is phased in too slowly
to have much budget impact yet. At most, a fifth of the deterioration
in the surplus is attributable to tax cuts. That's why Daschle plays
up the surplus projections for the next ten years, which are basically
worthless, rather than looking at this year's numbers.
Daschle could
have argued, as other liberals do, that Bush should have foreseen
that a recession would so reduce the surplus as to make his tax
cut unaffordable. But that amounts to saying that it's especially
worthwhile to keep high taxes during a recession — which is
absurd.
Even if the
tax cut were responsible for the vanishing of the surplus, that
wouldn't establish that it had hurt the economy. So Daschle goes
on to claim that smaller surpluses raise interest rates. But long-term
interest rates have not historically moved in tandem with the federal
budget balance: Over the last year they have fallen even as the
surplus has gone. Nor are lower interest rates the key to higher
growth. They reflect the return to capital, and rising returns can
encourage investment.
Finally, even
if Daschle's analysis were correct, he offers no solution —
as has been widely noted. He has too much political sense to call
for a repeal of Bush's tax cut. Indeed, he offers a grab-bag of
ineffectual tax cuts and new spending of his own. By his own logic,
they too should reduce the surplus, cause interest rates to rise,
and hurt the economy. Not only does Daschle's argument not make
sense, it doesn't even try to.
Bush responded
to Daschle's speech by calling his bluff on tax hikes. The president
appears to hold the whip hand on economic policy. He had been inclined
to compromise with the Democrats on a stimulus bill. But when they
proved recalcitrant — Daschle at one point set the condition
that two-thirds of his caucus would have to agree to any deal —
Republicans went on the attack. A modest expenditure of political
capital on the part of the president was enough to pin the blame
on Daschle for blocking a stimulus bill.
That's an inside-Washington
win — it's not the same as actually getting a good bill. A
new year gives Bush a new chance to do that. While the politicians
have squabbled, the economy has shown some signs of perking up on
its own. But it still needs, and voters want, measures to increase
investment. To improve incentives to invest will require permanent
tax cuts, not temporary ones. The most effective cuts would probably
be in the capital-gains tax and the top income-tax rate. Bush should
insist on a stimulus bill worthy of the name.
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