Jewish World Review May 13, 2003 / 11 Iyar, 5763
Losing sight of the dangers in creating further fiscal stimulus
http://www.jewishworldreview.com | The purpose of the proposed Republican and Democratic tax cuts is to create jobs - more than a million of them, according to the estimates. But, as Warren Buffett recently pointed out about the Bush administration's job-creation estimates, "That's like a manager saying we're going to grow our earnings 20 percent a year. They don't have the faintest idea, in my view, of how many jobs this is going to create. How could they? Economics is not that precise."
Granted, in a typical slowdown, or a typical jobless recovery, broad tax cuts would be a great idea. But this is not a typical jobless recovery. This time, we're emerging from two years of declining business investment, not a contraction in consumer spending. And, while it would be great to cut out taxes on dividends, I doubt that's likely to be much of a short-term stimulus to the economy.
But, philosophically, one of the reasons why I'm concerned about cutting dividend taxes and capital gains is because it means that work will be taxed disproportionately higher than investment. Admittedly, either case can be argued, but that's just where I come down on it.
However, while I'm not enthused about the Republican plans - nor those of the Democrats, for that matter - I realize that we will have a tax cut. Certainly, accelerating individual tax rate cuts is helpful, and raising incentives for small business is helpful. Anytime we can help small business in this country, we should do it. After all, small business creates most of the jobs.
But if goal is job creation, aren't there more direct measures that lawmakers should be considering? If we're trying to create jobs, let's create jobs. Our roads, highways and bridges in this country are in sore need of repair. Investing in our infrastructure would definitely create jobs and would immediately stimulate the economy - and the investment would be lasting.
And shouldn't all of those high-paying CEOs be showing more leadership? Right now, most are tepid - almost milquetoast - in their enthusiasm to invest in the growth of their own companies. Kick 'em in the pants, Mr. president. Tell them it's time to show initiative, not to indulge in caution. If you show the same leadership on this issue that you display in our national security, we could be sure it would work relatively quickly.
But the larger question is, do we even need additional stimulus at this point? I'm not sure we do. With deficits rising this year to more than $400 billion, I believe there is probably already enough fiscal stimulus in the economy. With the fed funds rate at 1.25 percent and high liquidity, we also have ample monetary stimulus. And there are numerous signs that the recovery may be picking up, from stronger corporate earnings to the market's recent performance.
"It's quite possible that we'll think that we didn't need a tax cut when we're looking in the rearview mirror a year and a half from now," says Joel Prakken, chairman of Macroeconomic Advisors. "That's a good reason for making a tax cut temporary. It's an insurance policy to take out, and if you don't need it, it goes away by itself."
Tax cuts - long-term or temporary - carry risks. As Stephen Roach of Morgan Stanley recently wrote, "To the extent that Bush administration policy proposals lead to ever-mounting federal budget deficits, serious new risks might afflict the economy - namely, an exploding balance-of-payments gap, a plunging dollar and rising interest rates."
While rates show no signs of rising from their 40-year lows, our trade deficit is indeed exploding, and the dollar is at a four-year low against the Euro. I hope our policymakers don't lose sight of the dangers in creating further fiscal stimulus. But then, I'm not running for election next year.
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05/06/03: Optimism is unfashionable, but here's some anyway