ON WEDNESDAY, November 28, two days after the U.S. economy was officially declared to be in recession, George W. Bush issued an impassioned and persuasive plea to Congress to send him “a significant package of tax cuts” that he could sign into law by Christmas. It was a terrific speech. Bush demanded acceleration of income tax rate cuts, and justifiably sniped at Democrats for larding their version of a stimulus bill with tens of billions of dollars of special interest pork. Better late than never. Unfortunately, the 2001 economic stimulus bill may no longer be salvageable. To salvage it, Bush must expend some of his vast storehouse of political capital to insist that a stimulus plan contain income tax cuts and capital gains tax relief. Without those items, a Bush-Daschle negotiated settlement would be worse than no stimulus bill at all. Pro-growth Republicans would be better off tarring the Democratic stimulus plan with ridicule, scrapping the bipartisan process altogether, and drafting a genuine economic growth package early next year if business conditions and the financial markets don’t improve on their own. Certainly, the death of the tax cut stimulus bill would be a blow to the U.S. economy. The nation’s business climate is the worst it’s been since Bush Sr. was president. The U.S. economy has plunged from a virtuous 3 to 4 percent real growth rate from 1995-2000 into negative territory this year. Roughly $300 billion in output has been irretrievably lost due to this recession. More than 2 million jobs have disappeared since the start of the year (that’s more than the entire workforce of Maine, New Hampshire, and Vermont), with half of those losses in the higher-paying manufacturing sector, and 400,000 jobs lost since September 11. Perhaps the most devastating indicator of the U.S. economy’s ills is that Americans have surrendered nearly $5 trillion in wealth in stock market losses over the past 20 months. In short, the economy could sure use a supply-side tax reduction stimulus bill right about now–a bill aimed at encouraging investment, capital spending, and business hiring. The Reagan model of economic recovery should have been the template for President Bush. In the early 1980s, when the country was at the height of the Cold War and in the throes of a mini-depression–a much deeper contraction than what we now face–Reagan enacted a major defense build-up and a tax cut five times larger than the current stimulus bill. The combination of those policies incited ridicule from the economics profession and most pundits in Washington, but it helped launch the 18-year expansion that just recently came to an end. Now as then, a big supply-side tax cut is the best way to rebuild the U.S. economy and finance the war effort through increased American productive capacity. And just to put the current economic stimulus debate in its proper context, the Reagan tax cut was about eight times larger than the Democratic tax cut and four times larger than even what the Republicans have proposed as anti-recession tonic this year. Size does matter. In fairness to George W. Bush, he is up against a Democratic opposition in Congress that is arguably the most hostile to market-based economic growth policies that any president has ever confronted. The Democratic stimulus bill is almost laughable in its ineptitude: It would give $9 billion in subsidies to Amtrak; $5 billion for earmarked highway projects (we just passed the most expensive road bill in history two years ago); $10 million to Montana bison producers (Senate Finance Committee chairman Max Baucus is from Montana); $200 million for eggplant, cauliflower, and pumpkin growers; and millions more for the supposedly beleaguered movie industry and for a handful of American Indian tribes. Meanwhile, most of the rest of the $73 billion bill would finance tax rebate checks to some 10 million Americans who didn’t qualify for rebate checks back in August. Why didn’t they qualify? Because they didn’t pay any income taxes. To call the Democratic spending bill a financial stimulus, quips former Reagan economist Arthur Laffer, “is not just bad economics, it is a mangling of the English language.” The Democrats have essentially adopted the Japanese model of economic recovery–throw tens of billions of dollars year after year into inane public works projects, and then watch the economy tank. Japan has increased its government sector spending and national debt twice as fast as any other industrialized nation over the past decade, and its economy is now wallowing in its eleventh year of depression. This is the model for the United States? What crackpot policies could possibly come next from the Democrats? An Argentinian-style call to devalue the U.S. currency? Even the Republican stimulus plan is a mild disappointment. It’s the equivalent of sticking on a hand of 17 in blackjack. To be sure, the House Republican bill has some positive attributes: a small cut in the capital gains tax to promote investment, elimination of the horrendously complicated corporate alternative tax, and a three-year incentive for business capital investment spending. But the House bill is too temporary (75 percent of the cuts would expire after two years), and is too respectful of the Left’s class-warfare arguments–for example, it reduces the lowest income tax rates, but not the most economically destructive highest tax rates–to accelerate short-term growth. Worst of all, the House Republican bill reads as if it were drafted by a horde of K Street corporate lobbyists (which, to some extent, it was). The press has had a field day lampooning the $10 billion in tax rebates to corporate America. Tax rebates are always the worst way to cut taxes because you can’t change behavior that has already happened. So we are left with a barely acceptable Republican bill that is surely the high-water mark in this debate. As House majority leader Dick Armey has said, “When we start negotiating with Daschle in the Senate, the stimulus bill is only going to get much worse, not better.” He’s right. The negotiations will likely produce a package of unappetizing, mushy oatmeal: tax rebates, federal spending measures, and a smattering of temporary business tax breaks. Tom Daschle and Dick Gephardt have already announced they can’t swallow income tax rate cuts “for the rich” or capital gains relief, and those are arguably the two most stimulative tax cut options. George W. Bush’s economists have warned him that walking away from a stimulus deal is a non-option because the financial markets have already favorably discounted the passage of this bill. I beg to differ. What bill, exactly, are the markets anticipating with such eagerness? And why would investors bid up asset prices in expectation of a stimulus bill that offers almost no economic steroids? The downside risk of accepting a bad bipartisan deal is substantial. A Bush-Daschle negotiated settlement will, at best, marginally improve economic conditions. More likely, it won’t provide any tangible bounce. And that outcome would be worst of all for pro-growth Republicans because it would only discredit the advisability of tax cutting in the future. Democrats have already memorized the anti-tax cut script for 2002: Last year we cut taxes twice and the economy didn’t improve, so why try it again? The problem is, there haven’t been any tax rate cuts to speak of yet. One final point. The whole idea of a “temporary stimulus bill” was always a misguided demand-side Keynesian concept. It is not the role of Congress to micromanage the economy, and we have 40 years of evidence that lawmakers aren’t very proficient at it when they try. The goal of pro-growth Republicans should be to advance economic policies that are consistent with long-term, non-inflationary economic growth. Almost every starting premise of the stimulus bill is inconsistent with long-term growth policies. It is permanent, not temporary, tax cuts that raise productivity rates and economic production. It is saving, capital investment, and risk-taking
that accelerates growth rates, not people rushing off to Wal-Mart or Toys “R” Us armed with their credit cards. Government spending financed by higher taxes or higher levels of debt doesn’t stimulate new economic activity, it crowds out growth-enhancing private activity. Each of these principles is anathema to the leaders of the modern day Democratic party. President Bush will never get the left wing of the Democratic party to agree to a stimulus plan that stimulates anything but government. He should stop trying. Stephen Moore is president of the Club for Growth.
