Boom, Bust, Whatever

Why it's always tax cut time


On January 4, Brookings Institution economist William Gale ridiculed George W. Bush, saying the president resembled a realtor always ready with a reason about why it's a good time to buy a house. "Either boom or bust the economy justifies a tax cut in their eyes," he wagged at the National Press Club before setting up and knocking down several justifications for the tax cut.

As a lifelong renter, I can't say if realtors are right about the house-buying thing. But in an era of persistent budget surpluses—which are nothing more than tax overpayments—the Bushies are right. A tax cut is the right thing to do, regardless of which way the economy is trending.

"The fundamental argument is over who controls the money," says San Francisco State University economist David Sisk. "Is the money to be spent in the command and control economy by politicians on programs that get more money when they fail? Or will it be spent by individuals in the private sector, where when you do badly you'll lose money and when you chose wisely your money grows?"

Economists have long known that not all tax cuts are created equal. Reductions in marginal rates, be they for individual, corporate or capital gains rates, have greater long-term growth effects, since they make work and investment more rewarding. Lump sum rebates, like a credit for having a kid, are not as useful. (SEE "The tax cut cometh.") But either is preferable to leaving the money in the hands of government, if you believe (as Bush, Alan Greenspan, and I do) that politicians will surely spend it.

"There are only two things that can be done with a surplus," proclaimed candidate Bush in Iowa way back in December, 1999. "It can be used by the government, as [President Clinton] proposes. Or it can be used by Americans, to save and build and invest. I choose the creation of wealth over the care and feeding of government."

Thousands of people live cushy lives caring for the government. The last thing they want is to send money back out of the Beltway without strings attached.

So while tax cut foes like Gale take pains to point out any shifts in Bush's argument for a tax cut, they overlook their own rhetorical about-faces in service of keeping the money flowing into Washington. (The line currently popular in the mainstream media–that Bush has changed the "justification" for his tax cut from letting Americans keep their money to it being an economic stimulant–is simply wrong. Bush and his chief economist, Larry Lindsey, always sold Bush's tax plan in part on its being an insurance policy against an economic slowdown. Said Bush in Iowa, "Putting more wealth in the hands of the earners and creators of wealth—now, before trouble comes—would give our current expansion a timely second wind." "Why have I called for a tax cut?" asked Lindsey, in a June, 1999 Washington Post profile, "Because we really can't afford to have a recession.")

Gale, who prefers a small tax cut composed of lump sum payments to lower- and middle-income tax payers, criticizes the Bush package for not giving the economy enough of a kick through short-term consumer demand. Writes Gale in the Los Angeles Times, "His proposal seems best designed to fight a hypothetical recession among high-income households that might occur in 2011."

Gale ought to check with at least one economic sage affiliated with Brookings. As late as October 25, 2000, Brookings Institution trustee and Citizens Financial Group, Inc. CEO Lawrence K. Fish co-authored an opinion editorial denouncing Bush's proposed tax cuts as being inflationary.

"This is no time—to the contrary, it is the worst conceivable time—to step on the gas," wrote Fish, who later warned, "A large tax cut in an age of unrivaled prosperity would turn [economic] theory—and perhaps the economy itself—on its head."

This had long been standard Democratic dogma. Said Al Gore in April 2000, "[The Bush tax plan] could raise interest rates, hurt investment, put all of our prosperity at risk, and drive us into inflation and recession."

When the economy was thought to be cruising at an ideal RPM, Brookings decried Bush's plan as a high-octane boost in consumer spending that would send the tachometer into the red zone. Yet a few months later, the same plan is now attacked for not doing much at all to increase consumer spending, even though that was never Bush's primary objective.

Who's selling houses now? The answer: Pretty much everybody in Washington, regardless of whether they have a Ph.D. in economics (although that certainly helps). Politicians and the economists they retain employ economic arguments as means towards achieving other ends. Thankfully, in the case of the surplus, the fundamental issue is easily grasped: Who do you want to spend it? Your representatives in Washington or yourself?