sent 21 January 2001
Re: "America cannot afford tax cuts," by Fred Bergsten, Financial Times, 12 January 2001.

Sir,

In his article "America cannot afford tax cuts" (January 12), Fred Bergsten argues against President George W. Bush's proposal to cut taxes on the grounds that this would reduce US national savings, hence would require that foreigners "finance" the tax cut. Given US balance of payments problems, Mr Bergsten fears this could trigger a flight from the dollar.

However, he appears to misunderstand a crucial accounting relation: the private, domestic, sector deficit is identically equal to the sum of the government budget surplus and the balance of payments deficit.

The Clinton expansion has been based to an unprecedented degree on private sector deficits (which have reached 6.5 per cent of GDP), and as private borrowing has declined over the past few weeks, the economy slowed. What Mr. Bergsten fails to realise is that tax cuts would help the private sector to restore a balance between its income and spending; indeed, rather than reducing "national savings", tax cuts would allow burdened households to retain more of their income and wealth-boosting private savings. He appears to assume that all of the tax cut would go to fuel imports, for otherwise it makes no sense to argue that foreigners will have to "finance" the tax cuts.

While there may be good reason to move the US trade position gradually toward balance, the immediate problem facing the economy is the strong likelihood of a hard landing. Somewhat surprisingly, Mr Bergsten ignores the facts that the stock market stopped rising long ago and that the evidence is accumulating that the economy is in a tailspin. The only problem with President Bush's proposal is that his tax cut is likely to be far too small, given the reduction of spending that will occur as households try to bring consumption in line with income.

Mr. Bergsten, like many economists, presumes that Alan Greenspan, the Fed chairman, can hold the economy on course by lowering interest rates. However, this could fuel continued expansion only if US households would continue to consume in excess of income - an inherently unsustainable proposition. Nor does this address Mr Bergsten's main fear, which is a potential flight from the dollar.

L. Randall Wray
Professor, Economics Department
University of Missouri
211 Haag Hall
5100 Rockhill Road
Kansas City, MO 64110 USA

Copyright: The Financial Times Limited
Copyright The Financial Times Limited 2000.