Has Greenspan Stolen Bush's Tax-Cut Thunder?

To hear the President-elect tell it, the Fed's big rate cut doesn't go far enough. But with his bold action, Greenspan holds the cards now

By Lee Walczak

There was no mistaking the trademark, slightly constricted expression on George W. Bush's face as he slouched and struggled his way through a press briefing on Jan. 3, the first day of his two-day economic "listening forum" in Austin, Tex. It was the look Bush often had when forced to endure Al Gore bulling his way through one of the Presidential debates, with the Veep nattering on about his Republican rival's "risky tax scheme."

Now Gore is off to obscurity, and Bush commands center stage, surrounded by a gaggle of adoring CEOs selected from an A-list of campaign contributors at his Austin confab. The Texan had hoped to use his two-day gabfest -- don't say "summit," that has unsavory Clinton connotations -- as a cheerleading session for his big but unloved $1.6 trillion tax cut. Instead, Alan Greenspan chose this moment to rain on Bush's parade. In a move that caught Dubya and his CEO lunch bunch off guard, the Federal Reserve chairman stunned the markets by pushing through a 50-basis-point rate cut well in advance of the central bank's next scheduled meeting.


  In an instant, the story became "Greenspan Rides to the Rescue," and Bush's choreographed event started to resemble a publicity stunt. That's not to say the President-elect didn't try gamely to drive home his none-too-subtle point: Even with the Fed in major economic-rescue mode, we still need a big tax cut to fend off the gathering storm. Forgetting his Presidential etiquette, Bush even insisted that Greenspan's half-point jolt of monetary stimulus "isn't enough" to assure long-term growth. Factually, he's right. The Fed is prepared to cut rates by as much as an additional 100 basis points, Fed watchers say, to stave off the recession that Bush keeps insisting is lurking just around the corner. (See BW Online, 1/4/01, "'The Fed Wanted to Nip the Panic in the Bud'")

But where does the central bank's action leave Bush's ambitious tax plan? Out on the periphery of counter-cyclical policy. By moving aggressively so early on, the Fed chief is signaling that he'll act with uncharacteristic boldness -- and occasional stealth -- to bolster sagging consumer confidence and keep the expansion from sputtering out.

Though the pro-Bush execs in Austin took pains to insist that the economy still needs the one-two punch of monetary easing and fiscal stimulus, the truth is more complex: When it comes to recession fighting, the injection of monetary liquidity works faster and far better than fiscal pump-priming via the tax code.

How come? Typically, Congress likes to knead a tax plan for months, attaching a pet provision here and a sneaky backdoor break there, until an unrecognizable lump of legislation finally emerges from tax-writing committees as the leaves turn in the fall. After that, there's another delay before the bill is signed and tax tables are modified, so by the time taxpayers feel the relief, the economic malaise it was supposed to cure has usually long passed.


  Bush knows this. He says he rejects Keynesian fine-tuning. But now he looks suspiciously like a man in search of a rationale for a campaign tax program that was primarily designed to bring the GOP's disparate social and economic conservative factions together, not to stimulate the economy.

"A lot of people underestimate the religious fervor that Republicans have for tax cuts," says Will Marshall, director of the Progressive Policy Institute, a moderate Democratic think tank. "Though these cuts are irresponsible, they have convinced themselves that this is just the tonic the economy needs." Far better, Democrats contend, is a downsized tax cut targeted at the middle class and a continuation of the fiscal restraint implied by paying off the national debt. That, these advocates argue, would give the Fed more leeway to cut rates without worrying about triggering inflation.

Bush's economists, led by new White House economic coordinator Lawrence B. Lindsey, see it another way. Those big cuts in marginal rates -- collapsing the current 39% and 36% brackets into a new 33% top rate and slashing the bottom tier from the existing 15% down to 10% to help the working poor -- will remove structural distortions in tax law that impede savings and block mobility to the middle class. The long-run effect: A supply-side burst of wealth creation not seen since the good old Reagan days.


  Both sides may have a point, but the argument might have just become moot. Greenspan's Fed has now shifted from cautious, quarter-point incrementalism to full-bore recession fighting. That dramatically underscores what most economists have always known: In the end, the main job of fending off a slump rests on Greenspan's droopy shoulders, not on the Man from Midland and his tax contract with America.

Should we cut taxes? Sure. The total tax burden is too high, the federal till has a surplus of money, and some struggling Americans who haven't shared in the 10-year boom obviously could use a break. But when the day comes to design an intelligent tax program, it ought to be done carefully, deliberately, and with social equity in mind -- not under the guise of a Bush-fanned stampede that has his Texas cowpokes shouting "recession insurance."

Walczak is Washington bureau chief for Business Week

Edited by Douglas Harbrecht

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