IF ONLY THE GOVERNMENT HAD MORE OF YOUR MONEY...

The Bush Tax Cuts Are Sapping America's Strength (Laura D'Andrea Tyson, 8/11/03, Business Week)

President Bush claims that the economic slowdown and the war on terrorism have triggered the nation's fiscal woes. But they are only part of the story. According to the Congressional Budget Office, over the next two years, the Bush tax cuts enacted since 2001 will cost nearly three times as much as the fighting and occupation in Afghanistan and Iraq, reconstruction and relief after September 11, and homeland security combined. What's more, these tax cuts are scheduled to explode, totaling $2 trillion over the decade. And that's assuming the sunset provisions phasing them out are enacted. If, as seems likely, they are not, the 10-year budgetary costs of the tax cuts will rise by another $2 trillion.

The Administration argues that its tax cuts are necessary to stimulate growth in a sluggish economy. But this argument is specious. The economy may have needed a temporary infusion of additional demand during the past three years. But temporary tax cuts or spending hikes for hard-pressed working families, unemployed workers, and state governments would have stimulated demand much more effectively than tax cuts for the rich. The Administration has also made misleading comments about the size of the tax benefits people will receive from the 2003 tax package. Although the average tax cut is about $1,000, that's because the tax breaks for the richest Americans are so large. More than half of all American taxpayers will get a reduction of less than $120 per year over the next two years. More than a third of taxpayers will get nothing.

And those long-term "supply-side" growth benefits? Even the Republican-controlled Joint Committee on Taxation, using a variety of dynamic scoring assumptions, was forced to admit that these cuts are likely to reduce the economy's long-term growth. Why? Any positive business-investment incentives from lower taxes will be outweighed by the curtailing of national saving and investment caused by mammoth budget deficits. To the extent that larger deficits diminish domestic saving, they eat into productive investment. To the extent that larger deficits are funded by borrowing from the rest of the world, they raise the nation's foreign debt and drive future income into servicing this debt. Contrary to the claims of Administration ideologues, larger deficits mean lower future living standards.

Ms Tyson always seemed like the best of a bad lot when she was in the Clinton administration, but this is nonsensical. First, we'd note two other significant factors driving the economic problems we have right now for which she's partly culpable: the high tech stock market bubble, which the Clintonistas did nothing to deflate, and their conspicuous failure to get a handle on domestic spending and reform entitlements while the economy was booming. One other factor, for which she's not directly to blame, but the Clinton team missed; Alan Greenspan and the Fed spent all of 2000 raising interest rates while we were heading into an obvious deflationary cycle, thereby helping bring about the economic slowdown (we don't call it a recession because it wasn't/isn't).

But let's ignore all that for the nonce and just grant her the argument that America's economy would be better off today had the tax cuts never happened. Okay, what's different? Well, you and I and all our fellow taxpayers have less money, so we feel worse about the situation and we aren't spending as much. The government has more money, so it borrows a little less and interest rates go down. What's that? You say interest rates went up while the budget was in surplus but have plunged to record lows now that we're running big deficits again? Okay, but the government would be saving that money so we'd have a higher national savings rate. Even setting aside the ridiculous notion that politicians would ever (or should ever) run a surplus during a recession, what would the government do with all that extra cash? Buy back bonds and retire the debt? And when US Treasuries grew scarce and there was no longer a safe instrument for people to put their money in, what would that do to the global economy? Meanwhile, since you and I don't have our tax dollars coming back to us are we putting as much in our 401k's and paying off as much of our mortgages? Is the actual amount of money saved in America really going up now that the government has your money instead of you? Last, foreigners are lending us less money because we need less and we're not paying them back in the lowest interest rates in our lifetimes. Okay, one for her. Though it seems strange that they're lending us money now if she's right and we're in such dire straits. We wouldn't seem like much of an investment. Posted by Orrin Judd at August 7, 2003 11:44 PM