SYNOPSIS: Don't sacrifice our long term economic prospects in the name of ending a short-term slump
Post-terror nerves aside, what mainly ails the U.S. economy is too much of a good thing. During the bubble years businesses overspent on capital equipment; the resulting overhang of excess capacity is a drag on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. But it seems inevitable that there will also be a fiscal stimulus package.
That package should include only measures that really will promote spending now, when the economy needs it. It shouldn't include anything that worsens the long-run budget position more than is necessary, or anything that looks like "hitchhiking," exploiting the short-run difficulties of the economy to pursue unrelated long-run goals.
Unfortunately, the Bush administration has just taken a big step away from those principles.
Until late last week it looked as if much of any stimulus package would consist of increased government spending to rebuild New York, to pay for military operations and to provide unemployment benefits. This would put money into the economy in a clearly temporary way.
Giving money to lower-income families would also be sensible. The problem with temporary tax breaks is that you can't be sure people will spend them; in fact, the much-vaunted rebate seems to have gone mainly into the bank rather than the economy. The chances are better if the money goes to poorer people, whose spending is often constrained by simple lack of cash.
But the big-ticket items in the stimulus proposal sketched out by administration officials on Thursday, and reaffirmed by George W. Bush after a meeting with Congressional hard-liners, are thoroughly wrongheaded — and they suggest that bipartisanship is over, that we're back to the cynical budget politics of the past.
One key proposal is a permanent new tax break for business investment. This violates the basic principle that stimulus proposals should be only short-term. Furthermore, it would probably have only a modest effect on business investment now, when there is excess capacity; but it would increase long-term interest rates, by increasing both future deficits and future business borrowing. And since long-term interest rates are what matter for housing, on balance this measure might well delay recovery instead of promoting it.
Another key administration proposal is an acceleration of tax cuts for higher income brackets that under current law are not scheduled to happen for several years. On the face of it this idea seems bizarre: it gives money to precisely the people who are least likely to spend it. Is this just a case of knee-jerk conservatism, of the belief that tax cuts for the affluent are the answer to all problems?
Alas, no: it's worse than that. The real reason to accelerate the Bush tax cut is surely to forestall the growing likelihood that part of that tax cut will eventually be rescinded.
Over the last couple of months the long-run budget outlook has darkened dramatically; we've gone from arguments about whether the Social Security surplus would be raided to the prospect of deficits plain and simple as far as the eye can see. A natural response, once the slowdown is over, would be to cancel some or all of the tax cuts, mainly for upper brackets, that are scheduled to happen in 2004 and beyond. As a political matter, that will be much harder to do if the cuts have already gone into effect.
And that, surely, is why the administration wants to accelerate the tax cut. It's being billed as a short-run stimulus proposal, but it's really a case of covert hitchhiking.
To add to the insult, a preliminary analysis of the numbers suggests that fuzzy math is back: the administration appears to be greatly understating the true budget cost of its proposals and pretending that a package that consists overwhelmingly of tax cuts is evenly split between tax cuts and spending.
As far as one can tell, the ultimate shape of the fiscal stimulus package is still fluid. The package that eventually emerges could be genuinely designed to help the economy, or it could be mainly a vehicle for political opportunism. Sadly, the latter possibility has just become much more likely.
Originally published in The New York Times, 10.7.01