 aura
Tyson, a past member of Clinton's Council of Economic Advisors, now
spends time as Dean of the London Business School, a bastion of Keynesian
economics. She's also a contributing writer for Business Week
magazine. In her latest column, entitled "This Year's Budget
Battle Could Be Bloody," she revisits a number of discredited
economic policies. Since there are an ever-increasing number of people
who are attracted to these crusty and illogical opinions, here are
a few counterpoints to Ms. Tyson's assertions.
"According
to recent numbers from the nonpartisan Congressional Budget Office
(CBO), during the past year the 10-year surplus for the federal
government declined by an astonishing $4 trillion."
Ms. Tyson should
know better than to try and pull the rabbit out of that hat. During
her tenure at the Council of Economic Advisors, the budget forecasts
for the Clinton administration projected continual absolute budget
deficits through at least 2005 (assuming constant inflation for
health care). At that time, one couldn't analyze a ten-year forecast
because they didn't make them.
Second, Ms. Tyson should avoid using a long-term budget forecast
to do serious economic analysis. The reason is that forecasted and
actual budget deficits and surpluses are enormously volatile. To
say that the budget surplus declined by an astonishing $4 trillion
belies an understanding of the temporary nature of the underlying
growth in the economy and the relationship between the technology
bubble and tax revenues. Once the bubble burst so did the Alice
in Wonderland story of future budget surpluses existing "as
far as the eye could see."
"What
are the policy implications of this remarkable reversal in the nation's
fiscal well-being? First, any stimulus package to ensure the economy's
recovery over the next 12 months must be small, temporary, and targeted."
What is Ms.
Tyson talking about? President Reagan initiated an enormous tax
cut not once but twice during his tenure as president and the economy
did just wonderfully. Her idea that you need a strong economy before
you can have serious tax cuts exposes her lack of understanding
of supply-side principles: the economy won't grow without the incentives
to get people working and producing. Any temporary fiscal stimulus
might be just that — temporary — with no long-term positive
effect, leaving the economy to continue languishing.
"The
centerpiece of these proposals — accelerating the reduction
in marginal income tax rates, scheduled to take effect between 2004
and 2006 — would cost $54 billion."
This is just
what a bureaucrat sounds like: tax revenues — or your tax dollars
— become "a cost." This is their money that's
in discussion, not your hard-earned money.
"Only
one quarter of the resulting tax relief would occur in 2002, however,
and all of it would go to the top 30% of income earners, who are
much less likely than middle- and low-income earners to boost spending
in response to lower taxes."
After all these
years, Ms. Tyson still doesn't get it. The tax cuts are tax-rate
cuts to stimulate output, not to redistribute money from one income
class to another. It just doesn't make a lot of sense to cut taxes
so as to increase spending by the rich — which she seems to
assume. The idea is to increase output.
Here is an
example: Suppose the government were to eliminate taxes on those
workers who worked an extra day a week, say Saturday. The purpose
of the tax "cut," i.e., no taxes on an extra day's work,
provides workers with the opportunity to work harder and increase
output, not to give them more after-tax income — although that
might be the motive for them to increase output.
"Congress
and the American people have the right to know how President Bush
proposes to restore fiscal discipline."
I guess Ms.
Tyson is having a hard time hearing — or perhaps she isn't
listening. The president answered that question precisely when he
requested that the tax rate reductions planned for future years
are accelerated to the present. By reducing tax rates now, people
on the margin will increase output, and that effort leads to increasing
economic growth that leads to greater government revenues that lowers
the need for deficit spending.
"As
Federal Reserve Chairman Alan Greenspan advised in his recent congressional
testimony, given these uncertainties, the Administration and Congress
should devise budgetary rules that make tax cuts and spending contingent
on the realization of specified targets for the budget surplus and
the federal debt."
There she goes
again. Ms. Tyson's world seems to revolve around the existence of
a budget surplus, a.k.a. the excess taxation of hard working individuals
and companies so as to allow the government to redistribute more
income to, well, its benefactors. The idea that you can't have a
tax cut unless there is a budget surplus turns economics on its
head. Tax cuts aren't a reward for workers, whether they are high-
or low-income workers. They are designed as an incentive to increase
output.
"Should
payroll taxes paid by low- and middle-income Americans be used to
finance scheduled tax cuts for the wealthiest 20% who receive as
much in total income as the remaining 80%?"
Will somebody
explain to Ms. Tyson that tax rate cuts are not designed
to be wealth-redistribution schemes? Again, they are designed to
increase output. When President John F. Kennedy proposed to cut
marginal tax rates from 92% (that's right 92%) to 70% in 1963, he
did so to increase output, not to give rich people more money. Kennedy's
famous phrase: "a rising tide raises all boats" referred
to making everyone better off through tax-rate reductions
— not just the people who received them. Since most entrepreneurial
wealth creators didn't pay those tax rates anyway, there were no
tax revenues associated with those ridiculous tax rates.
The bloody
budget battle that Ms. Tyson refers to is not about budgets but
about economic philosophies. In essence, she is arguing for a policy
of continuing budget surpluses: that means no tax-rate reductions
and temporary schemes to redistribute income from one class to another.
On the other hand, President Bush's approach — to grow the
economy by extending incentives to individuals so that they can
choose whether or not they want to engage in economic activity —
sounds more like the free-market based approach that most of us
can relate to.
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