White House economic adviser Lawrence B. Lindsey said yesterday that Senate Democrats risk repeating the mistakes of President Hoover by proposing to raise taxes during an economic slowdown.
President Hoover tried to balance the budget during the economic downturn of 1930-31 a move that historians say helped throw the economy into the Great Depression.
Prominent Democrats on the Senate Budget Committee recently proposed repealing portions of the $1.35 trillion tax cut enacted in May with the goal of increasing budget surpluses of $160 billion to $200 billion. They argue those surpluses, which are near record levels, are not big enough to accommodate government spending and pay down the national debt.
“President Hoover and a bipartisan majority in Congress focused first and foremost on the fiscal health of the country” to the detriment of the larger economy that generates the revenues collected by government, said Mr. Lindsey in a speech at the Federal Reserve Bank of Philadelphia.
“Their solution was to raise taxes… . The result … was economic disaster” as revenue plummeted with the gross national product, said the former Fed governor, who as a longtime adviser to President Bush was instrumental in designing the tax cut.
The Democratic proposal comes “at a delicate time for the entire global economy,” with growth worldwide largely dependent on the willingness of American consumers to keep spending, Mr. Lindsey said.
“The overwhelming majority of economic commentators” say the tax cut was unusually well-timed and should help keep consumers in a buying mood and boost economic growth in the coming year, he said, citing analysts from Merrill Lynch, Morgan Stanley Dean Witter and Macroeconomic Advisers, among other prominent private forecasters.
Federal Reserve Chairman Alan Greenspan added his voice to those who say the tax cut should play a critical role in nurturing an economic rebound toward the end of the year in testimony before the House Financial Services Committee Wednesday.
The Democratic proposal goes against “common sense” economics, he said. It also strangely bucks a bipartisan tradition that developed from the lessons of the 1930s: that the government should act as a “shock absorber” during times of economic trouble.
The most widely used economic textbook that advocates this “countercyclical” role for the government was written by Paul Samuelson, an economic adviser to President John F. Kennedy, whose legacy includes a major tax cut, he said.
Democratic President Franklin D. Roosevelt rejected proposals to maintain high taxes to reduce the huge national debt built up after World War II, arguing it would hurt consumer spending and it was wiser to reduce the debt gradually through growth in the economy.
Senate Budget Committee Chairman Kent Conrad argues that the Bush tax cut is “driving the country into the fiscal ditch” and should be rolled back in part.
The North Dakota Democrat conceded at a recent hearing that doing so would not be good for the economy right now, Mr. Lindsey said, but argued that taxes should be raised next year once an economic recovery is under way.
The Democratic plan would undermine elements of the tax cut designed to ensure it contributes to economic growth, Mr. Lindsey said. This year’s rebate for taxpayers is to be followed by gradual tax-rate reductions intended to permanently increase the disposable income of consumers.
The design should have “maximum effect on consumer behavior” and stimulate the economy because experience shows consumers spend their tax cuts only if they believe they represent a permanent increase in take-home pay and are not just one-time rebates, he said.
“Senator Conrad’s implied threat of a tax increase next year thus directly undermines the potential for this year’s tax cut to act as a stabilizing force” in the economy, Mr. Lindsey said.
“One does not have to look back to the 1930s to understand the folly of raising taxes just as the economy is beginning to recover. One need only look at Japan,” which in 1997 nipped an economic recovery in the bud by raising taxes.
“We must not allow the same mistake to happen here,” Mr. Lindsey said. “The timing of this tax cut was not a matter of accident… . The economy clearly needs the stimulus.”