- The Washington Times - Sunday, September 30, 2001

Admonishing Congress that it was "far more important to be right than quick," Federal Reserve Chairman Alan Greenspan advised legislators on Sept. 20 to wait at least a week before deciding to provide further fiscal stimulus to the U.S. economy, whose fortunes were dealt a severe blow by the Sept. 11 terrorist attacks. Fair enough.

More than a week has now transpired. And none of the economic information released in the interim suggests that the economy is in any better shape than the Federal Reserve itself reported in its most recent "Beige Book," a summary of economic conditions across the nation that is issued eight times a year. In fact, the economy has clearly gone from bad to worse. So, to paraphrase Mr. Greenspan, now is the time for the Congress and the administration to be both quick and right. Fiscal stimulus is clearly in order.

As a practical matter, policy-makers can provide fiscal stimulus by either increasing government spending or by reducing taxes. All things being equal, the latter course is always preferable to the former. In this case, however, all things are not equal. Fiscal stimulation on the spending side will be necessary to increase the nation's long-neglected defense budget in order to wage the long-term battle against terrorism the Bush administration envisions. Other spending will be needed to rebuild what the terrorists destroyed. The federal bailout of the airlines accounted for another spending increase. Beyond those issues, however, the propensity to spend must be resisted.

As the aftermath of the airline bailout demonstrated, the line of supplicants seeking federal help can be endless. Indeed, Congress must say "no" to the request for special favors by the airline employees who have lost their jobs. Those carriers that have invoked the "force majeure" clauses of their union contracts to avoid providing normal severance packages to discharged employees notably American Airlines and Northwest Airlines should be forced to use portions of their bailout shares to provide severance payments, as Continental Airlines, US Airways and Delta Air Lines have committed themselves to doing. Those who advocate spending nearly $40 billion for high-speed rail subsidies risk repeating the bad example of the Japanese, whose relentless efforts to pave over their nation and link every remote village by rail have failed to prevent Japan from plunging into its third recession in the past decade.

Clearly, tax cuts are the preferred route toward fiscal stimulus, and accelerating the phasing-in of the income tax rate reductions passed earlier this year is the preferable option. Reducing the tax on capital gains is always the right thing to do for two obvious reasons. In the first place, such action increases tax revenues in the short run, which can then be promptly rebated through the acceleration of the income tax rate reduction. Secondly, the capital gains tax inhibits the optimal allocation of capital, a condition that is especially odious during a recession when the economy can least afford such drags.

The final reason immediate tax relief is the much preferred policy option is because it can be achieved in a timely manner. There is no reason why Congress and the administration cannot quickly act to provide tax relief to be effective very early in the coming fourth quarter, the moment when the economy will most need it.

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