Coping With Econo-Myths

As published in The Washington Times, March 31, 2003

President Bush’s $726 billion tax-cut plan was shot down in the Senate last week, a victim of economic ignorance, an addiction to big spending and the war in Iraq.

The bad news: A distracted wartime president lost a key vote on the centerpiece of his domestic agenda, which, if it stands, may weaken future economic growth for the remainder of his term.

The good news: Several votes and hard negotiating lie ahead in the legislative process as the Senate goes into conference with the House (which approved Mr. Bush’s full tax cuts). Before this is over, Mr. Bush will most likely get something close to his original package.

After Republican leaders killed an earlier attempt to slash Mr. Bush’s economic stimulus package down to $350 billion, it seemed he would get most of what he proposed. But Democrats crushed that short-lived victory last Tuesday in a 51-48 vote, with the help of three Republican defectors — John Chafee of Rhode Island, who can’t decide whether he is a Republican or a Democrat; Olympia Snowe of Maine, who doesn’t understand growth economics; and George Voinovich of Ohio, who doesn’t like tax cuts period.

Ironically, the White House was ambushed by Democratic Sen. John Breaux of Louisiana, who played a key role in helping the president pass his $1.4 trillion tax-cut plan in 2001.

In opposing Mr. Bush’s new stimulus plan, Mr. Breaux argues it is too costly, especially with uncertainty over the war’s duration, and will worsen the deficit. Mr. Breaux’s first attempt failed to reduce the president’s tax-cut package failed because most Democrats oppose any tax cuts. But he won them over on the second try when he sweetened his half-a-loaf amendment with a provision to earmark some of the funds for Social Security and deficit reduction.

Sens. Chafee, Snowe and Voinovich — who have a collective obsession with the budget deficit and government debt — rarely talk about the need to stimulate stronger economic growth, from which federal revenue flows. Much of the deficit talk here is really a smokescreen to keep more money in Washington for higher spending.

If you doubt that, talk to Sen. Rick Santorum, Pennsylvania Republican. He kept a tally on the new spending Democrats tried to add to the budget last week and it totaled a whopping $1.6 trillion.

The myopia over deficits and debt is the result of several myths about debt loads that economist Larry Hunter effectively dispelled in a study for the Institute for Policy Innovation.

Among its findings:

Myth No. 1: Retiring debt is always sound policy. “The obsession over the amount of interest due on the public debt (about $3.45 trillion between 2000 and 2015) fails to take into account the growth-inducing private investment opportunities that would be taxed away ($3.64 trillion) in order to retire public debt and eliminate those interest payments,” Mr. Hunter says.

The former chief economist for the U.S. Chamber of Commerce notes that rolling over debt “is perfectly legitimate for any entity that’s growing wealthier.” The government’s annual tax take is more than $2 trillion a year, and this will continue to grow in the years to come (revenue has doubled in the past decade). Besides, with interest rates on U.S. Treasury bills paying between 1 percent and 3 percent, this is the cheapest money the Feds will ever borrow.

Invest that money in tax cuts and the yield in higher economic growth and increased revenues could be 10 percent or more.

Myth No. 2: Debt retirement increases savings. The opposite is true. When deficits turned into surpluses in the late 1990s, those surpluses came “almost directly at the expense of lower personal savings,” Mr. Hunter says.

Myth No. 3: Debt and deficit reduction lowers interest rates. In fact, the evidence shows interest rates are unaffected by budget deficits. Deficits soared in the 1980s to 6.1 percent of the gross domestic product, while interest rates fell. They are growing again now in the face of plummeting interest rates.

Myth No. 4: The country’s capacity to service debt is limited. If we can get the budget in balance and return surpluses to taxpayers through tax cuts, and if the economy grows at the same pace it has since World War II (3.2 percent a year), “the debt burden on the economy will fall to less than 15 percent of GDP by 2015 — without a single dollar of debt having been retired,” Mr. Hunter says.

Sure, it’s important to reduce debt, but you need increased revenue to do that. Thus, job No. 1 must be to stimulate faster growth, and that means cutting tax rates faster, as President Bush has proposed. Doing so will increase capital investment for business, boost savings and ultimately produce more jobs.

By cutting Mr. Bush’s tax package in half, Mr. Chafee, Mrs. Snowe and Mr. Voinovich are only prolonging the economy’s painfully slow recovery. This in turn will lead to weaker revenues, more borrowing and higher debt to cover the budget shortfalls.

These three need to take a crash course in supply-side economics. Instead of being obsessed with debt and budgetary bean-counting, they should be worried about growth.

Donald Lambro, chief political correspondent for The Washington Times, is a nationally syndicated columnist.