|
sent 14 January 2002
Re: "Tax Cuts Only When We Can Afford Them," by Ellen
Tauscher, Washington Post, 9 January 2002.
Letter to the editor:
In her editorial, the Honorable Ellen Tauscher (Representative, California)
suggests that fiscal responsibility should be maintained through adoption of
triggers that would tie future tax cuts to budget surpluses. While she
originally supported the President's tax cut plan, she makes it clear that
her support was contingent on projections of budget surpluses "as far as the
eye could see". Now that the surplus has disappeared, she wants to constrain
implementation of that plan. More generally, while she recognizes the
rapidly "dimming economic prospects", she would limit any economic stimulus
to what government can "afford". She claims that "lack of fiscal discipline
causes an uncertain economic future" and would raise interest rates and
crowd out business borrowing.
What Representative Tauscher fails to recognize is that those projected
budget surpluses were predicated on the highly implausible assumption that
Goldilocks growth could continue on the basis of entirely unprecedented
borrowing of households and firms to finance their own record deficit
spending. The recession, now three-quarters of a year old, began when
households and firms began to slow their rate of borrowing, having reached
record debt-to-income levels and simultaneously having satisfied their
respective desires for consumer durables and capital goods. The
disappearance of today's budget surplus is due to slower growth of private
sector income and declining wealth over the past year, rather than due to
the President's tax cuts (that are mostly in the future).
Given job losses, stagnant (at best) equity markets, and heavy debt loads,
the private sector is not going to be the engine of growth to fuel the next
expansion any time soon. Nor can the US rely on exports, as the recession is
spreading rapidly around the world, lowering demand for our output. Hence,
the only sector that can be relied upon for economic stimulus is the
government. The notion that "fiscal responsibility" limits government
spending to "what can be afforded" virtually guarantees a long recession
because the federal budget will continue to deteriorate with the economy.
What is needed is an immediate and large fiscal relaxation -- a
discretionarily-induced budget deficit-to cut taxes and increase federal
government spending. While we might debate the merits of the President's tax
cuts, which largely go to high income earners, an immediate refundable tax
credit against payroll taxes paid could help to relieve household budgets of
most Americans. Given the uncertainty and job loss already spreading across
the nation, almost any kind of tax cut is likely to be saved or used to pay
down debt. Hence, it is critically important that government spending
increase. Many areas could be targeted: unemployment insurance, health
care, aid to schools, transportation, the environment, and block grants to
states that are already reeling from the recession.
As to the Representative's claim that "fiscal responsibility" will keep
interest rates low, we should not have to point out that the US fought WWII
by running up budget deficits that equaled 25% of GDP while keeping interest
rates on government debt well below one percent; or that Japan's budget
deficit has reached to 8% of GDP at an interest rate that has hovered around
zero for half a decade. In contrast, the worst deficits of the Reagan-Bush
administrations peaked at about 5%. In short, we can have any interest rate
the Fed allows-regardless of the size of the deficit.
L. Randall Wray
Professor, Economics Department
211 Haag Hall, 5100 Rockhill Road
University of Missouri
Kansas City, MO 64110
phone 816-235-5687, fax 816-235-5263
|
