- The Washington Times - Wednesday, December 11, 2002

President Bush has recast his economic team. The Democratic Party leaders are huddled in private conferences, preparing their economic policy for the next two years. On Capitol Hill and in the White House, economic distribution chart software is being downloaded into computers. Algebraic regression equations are being double-checked. Both parties are laying in extra stocks of purple ink, in anticipation of prose to follow. Press secretaries in both parties are staring into mirrors, practicing their best sneers in preparation for describing the other party's proposals. The stage is being set for a titanic, once-in-a century partisan battle royal over which party can propose a better economic stimulus package. Divide et impera! Aut vincere aut mori! (Divide and rule. Victory or death, respectively.) What a lot of nonsense.

Over the next nine months or so, both parties will put forward essentially the same proposal, with the differences between their economic effects being approximately nil. Of course that's not the way they will be described. The Democrats will portray the Republican plan as straight-out theft from indigent single mothers and their pitiful dog-food-eating grandmothers the booty being transferred directly into the Swiss bank accounts of President Bush's obscenely wealthy friends and contributors.

The Republicans in their turn will warn the public that the Democratic plan will strip the tools of production from the hands of well-paid workers employed by wise and selfless employers who, under the Democratic plan, will be driven by justifiable fear of the envious, red in tooth and claw revolutionary welfare class to hide what is left of their money under their mattresses thus denying the economy the chance to grow.

The reality will be somewhat less dramatic. Because the Democratic Party long ago abandoned central planning doctrine for the magic of the marketplace, both parties have only one federal legislative policy tool in their kit bag of recession-fighters: tax cuts. Moreover, both parties recognize that some of those cuts must be given to: 1) business, to stimulate capital investment; 2) consumers, to encourage buying; and, 3) stockholders, to ease the pain of a fallen market and encourage their re-entry into the current markets.

But, because of excessive worrying about the size of the deficit (which takes massive federal spending off the table as a policy prescription for both parties), neither party is probably prepared to offer tax cuts of more than about $300 billion over 10 years (perhaps a third to a half of it in the first year). However, as our economy now produces more than $10 trillion of goods and services annually, no how cunningly targeted the cuts are, they will have a minimal stimulative effect. Even assuming our economy didn't grow over the next 10 years (in fact, it reliably almost doubles every 10 years), these proposals would only put an additional $300 billion dollars into $100 trillion of economic activity ($10 trillion per annum times 10) over the next ten years; or, a little less than 1/3000th addition to the economy.

But, with profits down, factories and other capital assets currently being used at only three-fourths of their capacity (and with flat economies in Europe and Japan offering little opportunities for increased sales abroad, and over-built commercial real estate at home) even tax inducements are not likely to motivate companies to increase substantially their investment in new capital factors in the near term. Consumers will spend most of what they get in tax cuts. But, consumers are already spending about $7 trillion a year. Assuming they get a third of the first-year tax cut (if the 10-year tax cut is $300 billion, the first year won't be higher than $100 billion to $150 billion, so the consumer's share would be no more than $50 billion in the first year), what is $50 billion extra dollars of consumer spending thrown into an ocean of $7 trillion? The answer is less than a 1 percent (0.7 percent) increase in consumer spending in the first year.

How will the two parties' proposals differ? The Democrats may take about $10 billion of first-year tax cuts from the upper-income, high-tax payers and shift it down a bracket (at the cost of fractionally less stimulation to investing). The Republicans may throw in making last year's tax cuts permanent in the 11th out year (2011). They will have slightly different forms of business tax breaks (economists will differ on their relative merits). In January, the Democrats will call for a modest increase in the minimum wage (which will either have no effect on the economy, or will slightly increase unemployment because it raises the cost of doing business for small businesses). The Senate Republicans, under pressure from their four liberals, will come out for the same minimum-wage increase and about six of the $10 billion dollars of the Democrat's downward-targeted consumer tax breaks in June. The House Republicans will begrudgingly concur in September.

With these minor functional differences in the two proposals over the next few years, the Republican bill will pass the House on final passage with almost all the Republicans and about 70 Democratic votes (maybe about 300-135). The same bill in the Senate will get all 51 Republican votes and five-10 Democratic votes (say, 59-41). If unemployment drifts down by a point and economic growth of at least 3.5 percent ensues (up from the current 3 percent), the Republicans will claim to be economic geniuses. Should the economy not tick upwards a little, the Democrats will scream that if only their bill had passed, we could have moved from despair to abundance. Why not just split the minimal differences, and pass the bill in January, when it might do a little good?

Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide