Tax Cuts: An Idea Whose Time Has Gone

The Bush Administration is finally admitting what most Americans have known for months: This puny recovery needs some help. Put another way, the Administration has suddenly realized that the combination of a sick economy and the lack of any definable agenda for domestic economic policy would be a political liability heading toward the 1992 elections. After a steady stream of tepid economic reports in recent weeks, the White House is now thinking seriously about tax cuts to spur things along.

In doing so, the Administration is falling into an all-too-familiar pattern: It is heeding short-term political pressures rather than the long-run needs of the economy. Tax cuts under the guise of recovery insurance would be a mistake. Even if the cuts were put through at the earliest possible date-next spring-the stimulus would not hit the economy until well into next year. By then, the recovery should already be self-sustaining, the result of past and, it is to be hoped, future easing of monetary policy by the Federal Reserve. The economy's immediate needs are best addressed by the Fed through cuts in interest rates. An economic boost from tax cuts would only complicate the Fed's job of keeping inflation in check. It could cause the central bank to tighten policy earlier in the recovery than it otherwise might. A tax package would also be a budget-buster. The deficit would mushroom even higher, and the bond market would react poorly at the thought of an even greater flood of Treasury paper. That would mean higher long-term interest rates than otherwise.

The economy's larger set of problems is structural, not cyclical. It will take years to address the intractable budget deficit, chronically poor productivity growth, a crumbling infrastructure, the job squeeze from restructuring in industries from banking to retailing, the low savings rate and record burden of debt, and the glut of commercial real estate. These long-run problems require long-run solutions. There will be defense savings that ought to provide an opportunity to address domestic economic objectives. A quick-fix tax cut motivated by election-year politics is pretty shallow, given the vision that fiscal policy now requires.

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