THE AIRLINES have too few passengers and too many seats, and so go to the government for an immediate $15 billion bailout. Amtrak has too many passengers and too few seats, and goes to the government for an immediate $3 billion bailout. The airlines want subsidies so that they can fly more empty seats; the railroad wants subsidies so that it can build more seats. Both were losing gobs of money before their managers ever heard of Osama bin Laden. Shareholders lucky enough to hold shares that have appreciated in value want relief from capital gains taxes. Shareholders unlucky enough to hold shares that have depreciated in value want relief in the form of the right to deduct more of those losses from their usual tax bill. In short, the feeding frenzy is on. Or, to mix a metaphor, there are more holes in the dike than budget director Mitch Daniels has fingers. “The dogs of war are not the only critters who have slipped the leash,” he moans. “Under the guise of fighting terrorism, repairing damage, fighting recession, you could fit almost anything.” Daniels is right. Among the benefits of Washington’s new seriousness must be counted the end of the Social Security lockbox—the fiction adopted by the Republicans to prevent the Democrats from spending the surplus, and by the Democrats to prevent the Republicans from making even deeper cuts in taxes. With the disruption caused by the terrorist attacks likely to push the economy into at least two quarters of negative growth—the economist’s definition of a recession—bipartisanship extends to fiscal policy, at least to the extent of a broad agreement that the surplus should be spent. That, of course, is progress of a sort. Until September 11, the politicians had locked themselves into the ludicrous position of running a tight fiscal policy as the economy slowed, offsetting some of the stimulative effects of Alan Greenspan’s repeated cuts in interest rates. The terrorists’ gift to both Democrats and Republicans is an excuse to spend that does not require them to confess past error. Closet Keynesians are now free to declare their fiscal preference. But here comes the hard part. The administration and the Congress immediately voted $20 billion for relief and reconstruction, upped to $40 billion in a brief meeting at which the junior senator from New York reported that “Chuck and I” persuaded the president to double the ante. Which encouraged the senior senator from New York to ask for still more, this time for Amtrak. “It is of fundamental importance,” claimed Chuck Schumer, “that Amtrak is provided with the tools [read, “money,” rather than “good management”] to continue to handle additional capacity in a safe and efficient manner during this crisis.” Don Young, the Alaska Republican who chairs the House Transportation and Infrastructure Committee, thinks $71 billion in government aid is about the right figure. Why Bush proved susceptible to Hillary’s charms remains a mystery; perhaps with the World Trade Center still smoking, “no” was not among the available answers. But it should have been. For if anything has become obvious after the disaster in New York, it is that the private sector is more than willing to make ample resources available to the victims of the attack. Left-wing entertainers who have spent a good part of their political lives calling for cuts in the military budget donated their time to a telethon that raised more than $150 million; the Red Cross is donating $30,000 to each of the families of those killed; and various funds are raising hundreds of millions more. If the government were to provide further billions, with the usual ostentatious announcements of its generosity (with other people’s money), private givers might decide that their relatively puny contributions either can’t matter very much or are unnecessary. Relief is not the only function served by the private sector. In addition, we have private sector plans for rebuilding the devastated area, in which some 25-30 million square feet of office space were destroyed—more by far than exist in the entire Washington, D.C., central business district. Some real estate entrepreneurs are talking about four 50-story towers; private donors are talking about funding a memorial park; the Guggenheim Museum is reportedly considering building a new Frank Gehry structure on the site of the former office buildings. It is too early to tell which of these plans, if any, will capture the imagination of the powers-that-be in New York. But it is not too early to worry that, as with relief funding, federal aid for reconstruction might prove counterproductive. There is a point—no one is quite sure of its exact location—at which government funding crowds out private sector efforts. Readers may remember Bella Abzug, the New York congresswoman and notoriously liberal supporter of an ever-expanding welfare state, who declined to support her aging mother because, she argued, that is the job of the government. And one can’t help thinking that the declining private savings rate has something to do with the coming of age, if that is the right term, of a generation taught to believe that the government will provide for them in a fashion appropriate to their golden years. So, too, with reconstruction. Private developers in New York are not untutored in the art of arithmetic. And they are not color-blind: They can tell the difference between black and red ink. Raised in a city that has a bewildering variety of subsidies and tax breaks for buildings designed to house only artists, or for office towers set back a few extra feet or built a few stories shorter, or for construction located in some area that politicians wish to see developed, they can sense the coming of a federal subsidy when it is still just a gleam in the eye of one of the congressmen whose campaigns they fund. Every dollar offered by the federal government is one less that private promoters, perpetually short of equity capital and often leveraged, as they say in New York, “up the wazoo,” have to raise. If a brief visit from the capital-raising team of Hillary and Chuck can pry an extra $20 billion from the president, surely there is more to come. Which is one reason why now is the time for the government to make it clear that any further handouts will be made only as part of an overall economic and fiscal policy that balances short-term necessities and the longer term requirements for a healthy, growing economy. First-come, first-served, is no such policy. The first step has already been taken. The handout to the airlines is particularly regrettable, since the industry suffers from excess capacity and a rapacious pilots’ union that periodically appropriates its profits, only one of the forces that keep fares high and seat utilization low. It is interesting that Michael O’Leary, chief executive of Britain’s Ryanair, a low-cost carrier, opposes government handouts to his larger competitors, and is asking nothing for his airline. O’Leary says that the way for his competitors to fill their seats is to lower their fares. Not as attractive as tapping the feds for money, but a lot better for consumers in the long run. How the rest of the surplus, and perhaps more, should be spent depends on what one thinks of the long-term prospects for the American economy. Alan Greenspan tells us that those prospects are quite good. Nothing that happened on September 11 has dampened the drive and initiative of the American people and its entrepreneurial class; nothing that happened on September 11 has destroyed the communications and information infrastructure that was built up in the 1990s, much of it by companies that will not be around to enjoy its fruits; nothing has dimmed the prospects for a steady increase in productivity. As the Fed chairman told the Senate Banking Committee, “We must not lose sight of our longer run prospects, which have not been significantly diminished by these terrible events.” THE CLEAR IMPLICATION OF THIS ANALYSIS is that it would be foolish to spend m
oney on huge public works projects, as the likes of Felix Rohatyn, former ambassador to France and self-styled savior of New York City during its 1970s financial crisis, are urging. Bush, says Rohatyn, should take a page from the book of Dwight Eisenhower, who authorized a 30-year, $250 billion (in current dollars) highway construction program. According to a study by the American Society of Civil Engineers, writes Rohatyn in the Wall Street Journal, we must spend $1.3 trillion over the next five years to bring our infrastructure up to “acceptable standards.” Airports need more than $60 billion, schools $427 billion, mass transit $111 billion, roads $350 billion, bridges $80 billion. “The list goes on and on,” writes Rohatyn. To use the money in the Social Security “lockbox” in this way would turn it into Pandora’s box, releasing, among other evils, the fear of inflation that is already making the bond market nervous and keeping long-term interest rates higher than they might otherwise be. Larry Lindsey, the president’s chief economic adviser and a member of the new White House working group known as the Domestic Consequences Committee, is throwing his formidable intellect in the path of any such plan. The Japanese, he is fond of pointing out, have paved over their country with just such infrastructure projects, and still have been unable to emerge from a decade-long recession. So cross massive infrastructure spending off the fiscal policy wish list. Eliminate, too, the use of federal funds to ease the pain of the many industries hurt by the current downturn and the aftermath of the terrorist attacks. Which means that the line of supplicants with outstretched hands should be turned away. Airline employees are being laid off in the tens of thousands, many without notice or severance pay, as airlines invoke force majeure clauses in their labor contracts. Investors in hotels are hurting, and their employees will share the pain. Travel agents are distraught and many, particularly the mom-and-pop shops, will disappear. Insurers have taken a hit, the dimensions of which are as yet unknown. Domestic car manufacturers, hurting before September 11, are groaning under the burden of interest-free loans and other discounts they must offer to induce traumatized customers back into showrooms. And the National Association of Manufacturers is seizing the moment: It thinks that across-the-board cuts in corporate taxes are an appropriate way to share in the sacrifices the president is calling on Americans to make. Many of these industries suffered from overcapacity, poor management, high-cost union contracts, and other problems before the bombing caused what history suggests will be a temporary reluctance by consumers to buy high-ticket items or to travel. Others are genuine victims of bad circumstance. But for the government to use its resources to ease the pain of any industry is to make those resources unavailable to the people who produced them in the first place: taxpayers. Instead of trying to decide which industry is worthy of its financial help, the government should let consumers decide that by cutting their taxes. Only one sector has an overriding claim on the government’s resources now, and that is the military and related defense industries. They must get what they need to make us safe, both by improving our “homeland” defenses, and by increasing our ability to destroy those pledged to destroy us. After those needs are met, we should consider a cut in taxes, especially in the regressive payroll tax. The benefits would be concentrated on the lower income groups that do not earn enough to pay income taxes and therefore did not share in the recent tax cut. Such a tax reduction would stimulate consumer demand considerably more than did the cuts that went to those with sufficient income to be taxpayers: Greenspan estimates that only 18 percent of that money found its way into shops and malls. A payroll tax cut has two added advantages: Once decided upon, it can be instituted so quickly that nothing will be lost by waiting to see if it is actually needed. And it is reversible. If we cut taxes, and sometime in 2002 find the economy to be stronger sooner than predicted, taxes can be raised. The reason for waiting a bit before acting—the course proposed by Greenspan and agreed to by House Minority Leader Gephardt, no less—is that economic forecasters are notoriously bad at predicting turning points in the business cycle. Although the economy had weakened before September 11, and the consensus forecast was for hard times ahead, there were signs that the economy might—just might—have reached bottom. Consumers were still spending, although a bit more slowly; initial jobless claims in August had stopped rising; the housing market was strong. So, too, there are signs that the sharp contraction produced by the attacks might prove short-lived. Consumers seem to be returning to the malls, and several operators report that they are hitting last year’s sales figures, New York and Washington being understandable exceptions. Traffic is picking up in car showrooms. The Wall Street Journal reports that “data on department-store traffic also show a rebound.” Even airline bookings are rising. I actually saw people at New York’s Plaza hotel with badges, and not those of our hero-cops. They were of the “Hi, I’m Charlie from Des Moines” sort favored by visiting conventioneers. Should this recovery from shock gather momentum, we might find that a stimulus package is unnecessary. Haste doesn’t always make waste, but in the case of hastily and ill-conceived stimulus packages it can lay waste to billions of dollars of taxpayers’ money. The second advantage of such a reduction of payroll taxes is its reversibility. Should the economy really take off in 2002, and should that takeoff not produce revenues from the supply-side effects of the tax cut, these taxes can be raised and excess purchasing power immediately drained from the system. This should make the effect of these tax cuts on long-term interest rates less than the effect of spending programs of similar sizes. If the spending program is of the capital-intensive infrastructure sort that Rohatyn has in mind, it cannot be turned on and off without incurring tremendous costs. And if it is on “housing, nutrition and other safety net” programs, as suggested in a recent editorial in the Washington Post, the expenditures will endure and grow long after this crisis has passed. It took a long time for the economy to shake off the effects of Lyndon Johnson’s guns-and-butter, Vietnam and Great Society, policy. Military expenditures kept rising, as did social spending. The advantage of a tax cut, if one is needed, is that it can be reversed if we have underestimated the demands on our limited resources of the war against terrorism. Entitlement programs, like huge infrastructure programs, roll on, whatever the economic and fiscal circumstances. So, start with the advice allegedly offered by Ronald Reagan in circumstances such as this: “Don’t just do something, stand there.” If standing there is not enough, go for a quick and significant shot in the arm of shopping-weary consumers. And reverse course if the stimulus turns the economy from pleasantly warm to overheated. If that be treason both to conservative non-interventionists who despise fine tuning, and to liberal free-spenders, make the most of it. Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of regulatory studies at the Hudson Institute, and a columnist for the Sunday Times (London).
