- The Washington Times - Friday, August 30, 2002

Historically, liberals have opposed tax cuts, while conservatives have opposed deficit spending. In the current climate, manifested by a dead-in-the-water economy arguably poised to dip into its second recession in three years, it's worth considering the policy implications of wasting short-term fiscal opportunities by arguing about long-term fiscal policy. After all, as one particularly famous fiscal enthusiast once observed, in the long run we're all dead anyway.

When the nonpartisan Congressional Budget Office (CBO) released its updated budget and economic outlook this week, both Democrats and Republicans used the occasion to score partisan political points. Senate Budget Committee Chairman Kent Conrad used CBO's more pessimistic analysis to accuse the White House of practicing "Enron-type accounting." Budget Director Mitch Daniels blamed the Democrats for their profligacy. Neither party seemed to give a second thought to the Conference Board's report on the same day revealing that consumer confidence had fallen in August to its lowest level since November. Consumer confidence is particularly important now because consumer spending, which comprises two-thirds of gross domestic product (GDP), has sharply decelerated recently, rising by an annual rate of less than 2 percent during the second quarter after expanding by 6 percent in the fourth quarter. Meanwhile, the annual growth rate of GDP during the second quarter was a paltry 1.1 percent.

In its latest estimate, the CBO projected a fiscal 2002 deficit of $157 billion, which represents 1.5 percent of GDP. Given the currently weak condition of the economy, this should cause no concern. In fiscal 1983, for example, when the economy was emerging from the 1981-82 recession, the deficit was 6 percent of GDP; in fiscal 1992, following the 1990-91 recession, the deficit was 4.7 percent of GDP.

Moreover, economists of all political persuasions recognize that a given level of deficit will have less stimulative effect at a higher rate of unemployment than at a lower rate. With the current level of unemployment at 5.9 percent, or 2 percentage points above the 3.9 percent unemployment rate at the peak of the last expansion, fiscal 2002's $157 billion deficit which represents only 1.5 percent of GDP may be only modestly expansionary, if not slightly contractionary. When appropriately adjusted to its full-employment level, today's deficit clearly is not excessive; in fact, it may be too small under current economic circumstances. In addition, CBO's projected deficits of $145 billion for 2003 and $111 billion for 2004, when it forecasts that the unemployment rate will average 5.8 percent, will also likely prove to be insufficiently expansionary.

With the economy and consumer confidence in such precarious states today, now is not the time to argue what the state of fiscal policy might be in 2012. Rather, policymakers in Congress and the White House should explore what previously legislated consumer-friendly tax-relief components can be implemented more quickly.

In particular, both parties should be able to reach a consensus to accelerate the implementation of tax relief aimed at the middle class. To this end, they should consider increasing the current $600-per-child tax credit to its eventual level of $1,000. Another option would be to immediately reduce the middle-class marginal income-tax rates of 30 percent and 27 percent to their eventual levels of 28 percent and 25 percent, respectively. And why not begin alleviating the egregious marriage penalty today?

As recent history has irrefutably demonstrated, making the right fiscal-policy decisions today can generate huge, beneficial changes in long-term fiscal projections. After all, wasn't that the lesson of 1997's seven-year bipartisan balanced-budget agreement, which, as it happened, achieved a surplus budget five years ahead of schedule?

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