by John M. Curtis
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Copyright December 21, 2001
All Rights Reserved.

olitics aside, economic stimulus bills shouldn't worsen an already sick economy by cutting taxes and creating bigger budget deficits. When the Clinton-era bull market unraveled in March 2000, economists knew that the good times couldn't last forever. Raining on Wall Street's parade, the Fed's relentless rate hikes eventually brought down the stock market—and indeed the economy. Recession—like pushing daisies—was inevitable, but few in the investment community, other than Warren Buffett, saw the economic calamity on the horizon. While the ship was sinking, even Wall Street gurus like Goldman Sach's Abby Joseph Cohen still counseled pie-in-the-sky, despite warning signs. When Buffett finally liquidated his holdings, it signaled the end of the longest bull market in U.S. history. Trillions of dollars lost and 20 months into the most catastrophic collapse since the Great Depression, the economy still reels from corporate downsizing and rising unemployment. Sept. 11 also didn't help matters, pushing a teetering economy into recession.

      With the war in Afghanistan winding down and mid-year elections getting close, the White House knows the fallout from a listless economy. Look what happened to George W. Bush's father after a spectacular victory against Saddam Hussein—though Ross Perot probably had more to do with his defeat. Pushing hard for his economic stimulus package, President Bush was rudely rebuffed by Senate Democrats, unwilling to risk further budget deficits for more tax cuts. Contrary to prevailing wisdom, last summer's tax cuts didn't stave off the impending recession, though it's easy to say things might be worse. While 9/11 cracked the economy, tax cuts and lowered revenues shattered the surplus. Back in 1980, Reagan argued that across-the-board tax cuts would stimulate the economy and wipe out Carter's ominous $60 billion deficit by 1983. Spoiling Reagan's plans, the deficit was actually $140 billion by 1983. While everyone wants a stimulus, they don't want to repeat past mistakes. Playing politics, "The fact that the Democrats were unwilling to meet us halfway does not excuse us from our duty to take decisive action," said Rep. William M. Thomas (Rep.-Bakersfield), chairman of the powerful House Ways and Means Committee.

      Despite some Democratic support, Congress was more concerned about how tax cuts would affect a growing budget deficit. Most economists see the Fed's loose monetary policy as more stimulation than either individual or business tax cuts. On the House floor, "Tonight we're faced with a fundamental difference between Democrats and Republicans," said Rep. Jack Kingston (Rep.-Ga.). "Would you rather have an unemployment check or would you rather have a job?" expressing the GOP's talking points, but failing to deal with legitimate concerns about growing deficits. In reality, bipartisan lawmakers were ambivalent about giving away more tax breaks. Back in the early '80s high interest rates were linked to budget deficits. New tax cuts and growing deficits could fuel inflation and higher interest rates, recreating the deadly stagflation seen before. More than anything, moderates weren't enamored with Bush's plan to cut $90 billion in new taxes. "It will never, never, never become law," said Rep. Charles B. Rangell (D-N.Y.), expressing the kind of bitter partisanship seen before 9/11.

      Whether the ill-fated bill provided too much corporate welfare is anyone's guess. Before any bill is approved, it's important to know whether it's going to help the economy. "The president will be delighted if Sen. Daschle would even just allow it to come up for a vote," said White House press secretary Ari Fleischer, pressuring senate Democrats to act on the stimulus package. But simply asserting that tax cuts stimulate the economy and create new jobs isn't enough. Last summer's tax cuts upended the budget surplus and didn't stave off recession. With the Fed continuing to slash rates, more tax cuts won't turn around the economy. Even Fed Chairman Alan Greenspan expressed his doubts that more tax cuts would do the trick. With fixed income securities—namely, bonds—looking less attractive, it's just a matter of time before investors return to equities. As mid-year elections get closer, voters begin looking at their wallets, not measuring progress in foreign wars. Unfortunately, the current economic stimulus package deteriorated into political finger pointing.

      Few people can argue with cutting taxes when the economy's generating surpluses. Republican's were right criticizing Clinton for not reducing taxes when the government raked in massive surpluses. Now that the economy turned south, it's difficult for Congress to justify big tax cuts without facing the prospects of looming budget deficits. Cutting more taxes and reducing government revenue risks returning to the same deficits and government borrowing that created "malaise" or stagflation in last days of Jimmy Carter. While Republicans look to score points, Daschle's also disingenuous blaming the bill's fate on simple differences in philosophy. Many in Congress are genuinely worried about returning to deficit spending. Though the White House seems less concerned, it's not proven that tax cuts are worth risking budget deficits. Corporate downsizing has always been part of economic recoveries, where companies must show better earnings. As economists tell us, earnings drive the market—and the market leads the economy to eventual recovery.

      Failure of the current economic stimulus bill reflects a healthy emotional recovery from the horrific events of 9/11. While the country's solidly behind the president in Afghanistan, the public welcomes healthy dissent on important domestic matters. No issue is more pressing than curing the mighty U.S. economy of its current affliction. While some Republicans and Democrats differ on how to proceed, both agree that looming budget deficits go in the wrong direction. Before cutting taxes and reducing revenue, the current business cycle must be given a chance to readjust—including the pain of unemployment. Layoffs and downsizing are needed to return businesses to profitability. Instead of scoring points, lawmakers should be working together to solve the current economic mess. Next year's elections have little to do with what's best for today's economy. Avoiding deficits and keeping interest rates low should eventually turn things around. Politics aside, no one should reinvent the wheel and repeat past mistakes.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He's director of a Los Angeles think tank specializing in political consulting and strategic communication. He's author of Dodging The Bullet and Operation Charisma.

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