Daschlenomics
Why the senator is wrong and the president is right.

By NR Editors
From the January 28, 2002, issue of National Review.

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.