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sent 14 January 2002
Re: "Tax Cuts Only When We Can Afford Them," by Ellen Tauscher, Washington Post, 9 January 2002.


Letter to the editor:

In her editorial, the Honorable Ellen Tauscher (Representative, California) suggests that fiscal responsibility should be maintained through adoption of triggers that would tie future tax cuts to budget surpluses. While she originally supported the President's tax cut plan, she makes it clear that her support was contingent on projections of budget surpluses "as far as the eye could see". Now that the surplus has disappeared, she wants to constrain implementation of that plan. More generally, while she recognizes the rapidly "dimming economic prospects", she would limit any economic stimulus to what government can "afford". She claims that "lack of fiscal discipline causes an uncertain economic future" and would raise interest rates and crowd out business borrowing.

What Representative Tauscher fails to recognize is that those projected budget surpluses were predicated on the highly implausible assumption that Goldilocks growth could continue on the basis of entirely unprecedented borrowing of households and firms to finance their own record deficit spending. The recession, now three-quarters of a year old, began when households and firms began to slow their rate of borrowing, having reached record debt-to-income levels and simultaneously having satisfied their respective desires for consumer durables and capital goods. The disappearance of today's budget surplus is due to slower growth of private sector income and declining wealth over the past year, rather than due to the President's tax cuts (that are mostly in the future).

Given job losses, stagnant (at best) equity markets, and heavy debt loads, the private sector is not going to be the engine of growth to fuel the next expansion any time soon. Nor can the US rely on exports, as the recession is spreading rapidly around the world, lowering demand for our output. Hence, the only sector that can be relied upon for economic stimulus is the government. The notion that "fiscal responsibility" limits government spending to "what can be afforded" virtually guarantees a long recession because the federal budget will continue to deteriorate with the economy. What is needed is an immediate and large fiscal relaxation -- a discretionarily-induced budget deficit-to cut taxes and increase federal government spending. While we might debate the merits of the President's tax cuts, which largely go to high income earners, an immediate refundable tax credit against payroll taxes paid could help to relieve household budgets of most Americans. Given the uncertainty and job loss already spreading across the nation, almost any kind of tax cut is likely to be saved or used to pay down debt. Hence, it is critically important that government spending increase. Many areas could be targeted: unemployment insurance, health care, aid to schools, transportation, the environment, and block grants to states that are already reeling from the recession.

As to the Representative's claim that "fiscal responsibility" will keep interest rates low, we should not have to point out that the US fought WWII by running up budget deficits that equaled 25% of GDP while keeping interest rates on government debt well below one percent; or that Japan's budget deficit has reached to 8% of GDP at an interest rate that has hovered around zero for half a decade. In contrast, the worst deficits of the Reagan-Bush administrations peaked at about 5%. In short, we can have any interest rate the Fed allows-regardless of the size of the deficit.

L. Randall Wray
Professor, Economics Department
211 Haag Hall, 5100 Rockhill Road
University of Missouri
Kansas City, MO 64110
phone 816-235-5687, fax 816-235-5263
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