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       “THERE ARE CLEAR warning signs, warning signs which will require action in the halls of Congress,” Bush said in urging passage of his $1.6 trillion, 10-year tax cut.
       But a number of economists, including both conservatives and liberals, have expressed serious doubt that any tax cut could be passed and implemented quickly enough to help the economy avoid an imminent slump. Several also said it is not yet clear that the economy needs any such stimulus, and if it does, they say it would be better to let the Federal Reserve provide it through monetary policy with a fast series of interest-rate cuts.

Moreover, as proposed during the campaign, Bush’s tax cut would not take effect until 2002 and would then be phased in over several years — a timetable that would give the economy little if any boost next year, the economists said. The slow beginning and gradual implementation was designed to hold down its cost in terms of lost government revenue over a decade, the period of estimation required by congressional budget procedures.
       While at various times Bush, Vice President-elect Cheney and some of their advisers said the tax proposal could be useful in warding off a possible economic slump, the president-elect also has stressed other rationales. The one most frequently mentioned was the need to reduce the federal tax burden so families would be allowed to keep more of what they earn to meet their differing needs.        A Bush spokeswoman said the president-elect is committed to sending a legislative proposal to Capitol Hill with exactly the same provisions he promised in the campaign. But unnamed groups of Bush advisers are already working with some members of Congress to speed passage of the tax cut, which could well be modified in the process, the spokeswoman said.
       Speeding up the tax cuts could raise the 10-year cost dramatically, however, and several analysts said quick passage is highly unlikely unless the distribution of the tax cuts by income groups is modified to attract Democratic support. Under the current proposal, a large share of the tax relief flows to upper-bracket taxpayers.
       “The jury is still out on whether the [economic] weakness will turn into a problem or whether it is just the medicine the doctor — [Fed Chairman Alan] Greenspan, of course-ordered to dampen the fires of inflation. When we do know, it will be too late” for a timely tax cut, said Robert Reischauer of the Urban Institute, a Democrat and former director of the Congressional Budget Office.
       Reischauer said that in the past when government policymakers tried to cut taxes or increase spending to give the economy a short-term fiscal boost, the actions usually came too late to do much good.
       “There are long lags before monetary policy kicks in, but even longer for fiscal policy,” Reischauer said. “It’s hard to imagine any impact before late fall, because it will take the new administration some time to get its policy formulated and sent up to Capitol Hill. It will take Congress several months to pass a budget resolution and deal with the policy proposals, and then it will take several months to get the cuts implemented.”
       If a recession similar in length to that of 1990-91 were to begin next month-which virtually no forecaster is predicting-then it would be over by the end of the summer. By Reischauer’s timetable, it would be over before any taxpayer likely would have received any benefit from a tax cut.
       
NEED FOR TAX CUT QUESTIONED
       Rudy Penner, another former CBO director at the Urban Institute but a Republican, also questioned whether a stimulative tax cut is needed and said it would be impossible to time it correctly. On the other hand, Penner added, a long-term tax cut may well be in order for other reasons, particularly as estimates of future surpluses keep getting larger.
       Yesterday, for example, President Clinton announced that new figures from the Office of Management and Budget showed that if federal spending were to rise only in line with inflation in coming years, the government’s $3.2 trillion debt-not including debt held by federal trust funds, such as Social Security-could be paid off by 2009.
       John B. Taylor, a Stanford University economist who has been mentioned as a possible chairman of the Council of Economic Advisers in the Bush administration, as recently as summer was sharply critical of “discretionary countercyclical” fiscal policy-using changes in taxes or government spending to counter the peaks and valleys of economic cycles.
       Writing in the Journal of Economic Perspectives, Taylor said, “Much has happened in macroeconomics since the 1960s and 1970s when discretionary countercyclical fiscal policy was last considered a serious option in the United States.”

       The biggest change, Taylor said, has been in the way the Fed has conducted monetary policy, with the result that “inflation has been low since the early 1980s and the real economy has been more stable.”
       “If the countercyclical goals of fiscal and monetary policy are the same, then why not simply let monetary policy do the job? ... In recent years, the Fed appears to be making the needed adjustments more successfully than ever before, so the role for fiscal policy seems to have diminished. ... It is also likely that the use of discretionary fiscal policy could make the Fed’s job more difficult.”
       “In the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizers,” Taylor concluded.
       
‘AUTOMATIC STABILIZERS’
       The “automatic stabilizers” are the features of U.S. tax law and government spending programs that come into play without any new government policy when the state of the economy changes noticeably.
       In a recession, for instance, the incomes of individuals normally decline when they become unemployed. At the same time, business profits usually fall. In both cases, part of the loss of income is cushioned because the taxes owed to the government also go down. For individuals, part of cushioning also comes from that fact that their remaining income probably falls into lower tax brackets.
       Meanwhile, some government spending also goes up automatically. As more people become unemployed, more is spent to pay unemployment benefits and some older jobless individuals may choose to retire and begin drawing Social Security benefits. Welfare outlays may also rise along with those for other income support programs.
       Taylor argued that the automatic stabilizers “represent such a predictable and systematic response” to short-term changes in the economy that “it would be appropriate in the present American context for discretionary fiscal policy to be saved explicitly for longer-term issues.”
       In an interview yesterday, Taylor said the Bush tax proposal is not an example of the type of “discretionary” fiscal policy whose value he questioned in his article. Instead, the plan addresses longer-term issues, such as reducing marginal income tax rates and reducing the overall tax burden relative to the size of the economy, both of which, he said, will improve economic efficiency.
               As for speeding up the cuts, Taylor said, “I don’t think it’s essential. If that’s the timing that’s most acceptable to the Congress, that’s okay.” And there would be some limited impact on the economy from “expectational effects” once the cuts were enacted even if they didn’t go into effect immediately, he added. In other words, consumers might spend more now if they know a tax cut is coming later.
       Taylor also said one argument against the Bush proposal made during the campaign certainly is no longer valid, if it ever was.
       “For a long time in the campaign, a lot of questions were being raised about the tax cut coming at the wrong time, when there was a strong economy,” and the Fed was already raising interest rates to cool it and keep inflation under control. Now, he said, “with the economy progressing slowly, that should not be a reason not to have a tax cut.”
       
GREENSPAN’S ROLE
       One big question about the Bush plan is what Fed Chairman Greenspan will have to say about it. In speeches and congressional testimony over the past few years, he has argued that it would be much better for the economy and the federal government’s ability to meet its future budget obligations to “let the surpluses run” rather than cut taxes. Using the federal budget surpluses to pay off more and more of the national debt would keep interest rates low and encourage added business investment that would boost the economy’s capacity to produce goods and services in coming years, he argued.
       The Fed chairman also stressed that paying down the debt would reduce the government’s annual interest bill and increase its ability to deal with the mammoth challenge of paying Social Security and Medicare benefits when the baby-boom generation retires in coming years.
       Some Bush supporters are hoping Greenspan will take a different view early next year when economic growth is likely to be running at a far slower pace than in the past two years. They take comfort that Greenspan is not opposed to tax cuts themselves.
       Greenspan told the House Banking Committee in February when the Fed was raising interest rates to cool off what threatened to become an overheated economy: “At the appropriate time, I’m very much strongly in favor of tax cuts.
       “It’s at this particular time that that would not be my first priority. It’s my second priority. ... That is, if you can’t for political reasons hold the surplus in place and reduce the debt, then I would be far more supportive of cutting taxes than increasing spending,” he said.
       A perhaps more subtle issue may be whether Greenspan would be willing to acknowledge that the Fed needs help managing the economy’s ups and downs from a tax cut whose timing and size would remain in doubt.
       Albert Wojnilower of Monitor-Clipper Partners is one well-known Wall Street analyst who believes that long-term interest rates, which are more important economically than short-term rates, aren’t likely to come down if the Fed were to cut short-term rates in coming months. As a result, he believes a quick $100 billion-a-year tax cut is also needed.
       But many other economists-including J. Bradford De Long of the University of California at Berkeley, who served in the Treasury during President Clinton’s first term-completely disagree.
       “Maybe Wojnilower is looking at some economy in the future in which long rates are following their own course, but I don’t think we are in it now,” De Long said. “The idea that we need a tax cut to help the economy [in the short run] is a regression to the old days. The Fed is the best one to do what’s needed because they time things better. . . . I thought that was a lesson that we all had learned.”
       
       © 2000 The Washington Post Company


-- (perry@ofuzzy1.com), December 29, 2000

Answers

Meanwhile, some government spending also goes up automatically. As more people become unemployed, more is spent to pay unemployment benefits...

And I thought that businesses had paid a 'fee' into the unemployment fund. I didn't know that this was just yet another tax.

Considering how many good jobs are going to be nailed this quarter alone, a tax cut won't help.

-- (perry@ofuzzy1.com), December 29, 2000.