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Copley News Service, 10/31/2001
In a recent letter to The Wall Street Journal, President George W. Bush's chief economic adviser, Larry Lindsey, said, "The economy needs speedy enactment of the president's (stimulus) plan to encourage both investment and consumption." I respectfully disagree. The economy requires no "stimulus" from government; what it needs is for government to cease and desist harmful policies that turned a vibrant and thriving economy into a basket case.
Reluctantly, I have come to the conclusion the neither the administration nor the Congress has developed an economic battle plan that is commensurate with the problems and challenges we are experiencing. And while I'm an enthusiastic supporter of the president's battle plan against terrorism and reluctant to criticize, I believe Lindsey, as an administration spokesmen, is sending confusing and contradictory signals to the Congress and the American public about the state of our economy.
Our current economic problems are neither the result of the "normal operation of the business cycle" nor the aftermath of a "burst bubble." My best reading of the economic data is that we are in a deflationary recession inadvertently created by the Federal Reserve Board and exacerbated by a tax code so anti-growth that, in Treasury Secretary Paul O'Neill's words, it is "unworthy of an advanced civilization." The attack of Sept. 11 further traumatized an already staggering economy.
Contrary to wishful thinking among many pundits and some government officials, the economy was not on the mend before Sept. 11, and the main obstacle to economic revival is not a collapse in consumer confidence brought about by the attack. And with all due respect to Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin, I disagree with their view that cutting tax rates is risky and that an increase in long-term interest rates poses a serious constraint on how much tax rates can be reduced to restore incentives to work, save and invest. They sound like Al Gore.
The empirical evidence clearly disproves any notion that cutting income tax rates "too much," including the capital gains tax rate, will raise long-term interest rates. In our $10 trillion economy and a global capital market with daily transactions on the order of $2 trillion in which long-term interest rates are set, even a $200 or $300 billion annual reduction in revenues would have no discernible effect on interest rates. Tax rates should be cut broadly and deeply immediately, not to "jump-start" the economy with "fiscal stimulus" or to "put money in consumers' pockets," but rather to remove the huge disincentives to work, save and invest produced by taxing income four and five times at high rate as we do currently.
The president's so-called stimulus package outlined on Oct. 5 suggested some very desirable tax policy changes; however, it omitted the most powerful of all incremental tax reforms -- a capital gains tax rate reduction. It also fell far short of the kind of comprehensive economic strategy that is required in these unusual and perilous times.
Our laudable war effort will be significantly hampered if the economy does not resume growing at least as fast as it has grown on average since the end of World War II, about 3.2 percent a year. With the right policies, we can grow even stronger and faster.
I am concerned that none of the tax packages currently under consideration will be sufficient by themselves to restore even the average rate of economic growth. Not only do they provide inadequate incentives to work, save and invest, the preoccupation with cutting taxes to put money in consumers' pockets is distracting the nation from the foremost impediment to economic revival, namely deflationary monetary policy by the Fed. Congress and the president must demand an end to deflationary monetary and insist that the Fed replace discretionary monetary policy based on targeting short-term interest rates with monetary policy based upon targeting market price signals. And tax policy needs to concentrate on removing the disincentives to work, save and invest that are endemic to the current tax code. These fundamental reforms cannot be achieved without strong presidential leadership.
I know in a time of war many of the president's advisers are telling him that fundamental economic policy reforms are diversions from the war effort and politically impossible. To the contrary, such reforms are essential to the war effort. I praise Bush for having the independence of mind on foreign policy to transcend powerful conventional wisdom within the administration. The country's security and prosperity depend on his having the same courageous independence of mind where the economy is concerned. Economic policy in wartime is too important to be left to economists and Cabinet secretaries alone.