SYNOPSIS: We must have a short-term government spending increase to help our economy, not more long term, backloaded tax cuts
Is everything different now? Yes and no. Last week's atrocity has shaken us and realigned our priorities. But many things remain the same. Among them is the basic quandary of U.S. economic policy, which has by no means gone away. It has simply become more fraught.
And if our leaders ignore that quandary — or worse yet, if they seem in retrospect to have taken political advantage of our national trauma — we will pay a large price, not only economically but in terms of national unity.
The terrorist attack has temporarily suspended the budget debate that dominated politics only 10 days ago. Nobody now thinks that we should worry about balancing the non-Social Security budget this year or next.
But the real concern in the days before the attack wasn't this year's or next year's budget. It was the truth — which had finally become almost impossible to deny, though some tried — that the tax cut had wreaked havoc with our long-run fiscal prospects. It was becoming clear that we could not pay for essential government programs and simultaneously build up the financial reserves needed to pay benefits to future retirees.
And the attack has not changed that truth. Indeed, the long-run fiscal prospect now looks far worse than before — a point not missed by bond markets, which have driven up long-run interest rates sharply since the attack. War, whatever form it takes, is a very expensive proposition.
So what should we do — especially given the pressure to do something right now to prop up the economy?
First, we should do no harm. If it was irresponsible to propose further long-run tax cuts before the current crisis — and it was — it is all the more irresponsible to do so now.
But doesn't the economy need a stimulus? Yes, it does — but it needs a stimulus now, not a stimulus five years from now. We should focus on measures that help the current economy without further mortgaging our future.
What about a temporary tax cut? Frankly, it's hard to believe that such a cut will lead to much additional spending — especially if it goes mainly into the pockets of affluent consumers, whose spending is not limited by lack of ready cash. A tax cut for less affluent families, such as a temporary payroll tax cut, might do more. But basically we should rid ourselves of the notion that tax cuts are the answer to all problems.
The best way to help the economy right now is with a large, temporary increase in government spending. Such spending would create jobs now, when we need them — unlike tax cuts whose biggest effects will come in 2005 and after.
And last week's events made it clear how to spend the money. We need to rebuild New York. We need a rapid buildup of national defense broadly defined, going far beyond traditional military issues — for surely the list of things that have been dangerously neglected does not stop with airport security. And now is not the time to quibble too much about helping a distressed industry; the airlines are in dire need of a bailout.
Unfortunately, Congressional leaders seem fixated on a truly terrible idea: a permanent cut in the capital gains tax.
The economic impact of this move would be uncertain at best. Its most obvious effect would be to encourage people to sell stocks, driving markets down even further. There might be a temporary spike in revenue as people dump assets, but over the long run the Treasury would lose large sums.
And what about symbolism? Last week President Bush praised the nation for its spirit of "sacrifice and patriotism." Should one of the first major actions taken in the name of shared national sacrifice be a tax cut of dubious economic value, which delivers 80 percent of its direct benefits to the wealthiest 2 percent of the population?
Not many people will dare denounce this as opportunism at a time when anyone who questions our leadership, on any issue, is accused of lacking patriotism. But in the years ahead, as the fiscal squeeze tightens, the sense that some politicians took advantage of our trauma to push this measure through will not help our new-found sense of national unity.
Mr. Bush can and should stop this disastrous idea now. He should tell Congress to focus on what the country needs, not on what a wealthy minority wants.
Originally published in The New York Times, 9.19.01