Bush's Economic Strategy Has No Gain, Only More Pain

By: Ralph Martire

Well, it's almost a new year, a time when most folks reflect on the big events of the last 12 months and consider their implications for the future. It strikes me that the one recent event that will most influence our future is the Republicans taking control of all major branches of the federal government. Now that a clear path has been laid for the President's agenda, what can we expect?

For one thing, President Bush claims he wants to stimulate the economy and help working families. Sounds good - but the reality doesn't match his rhetoric. That's because he insists on pursuing a tax policy agenda that would neither stimulate the economy nor help working families.

Consider his desire to stimulate the economy. Economic stimulus packages come in two forms: quick hits meant to create an immediate economic spark, and long-term packages meant to promote sustained growth. The President's initiatives won't accomplish either.

If the President's desire is to spur the economy quickly with tax breaks, he is missing the boat. Most economists consider tax breaks to be a fairly dubious method for quickly stimulating the economy. That's because of the significant time lag between when a tax break is enacted and when its economic benefits filter down to taxpayers. You can't get an immediate spark from something that happens a year down the road. So, the potential for a tax break creating an immediate stimulus is nil.

The specifics of Bush's proposal also fail to address the economy's real problems. For instance, the President is again pushing a hefty tax break to encourage businesses to buy additional equipment. News flash: The recent economic downturn exists primarily because of excess industrial capacity, which means businesses have more equipment and employees than they need to meet demand. Creating that tax break will make the excess capacity problem worse.

That won't help workers. In fact, to relieve excess capacity, businesses have only three choices: Get rid of equipment, increase sales (thereby putting the extra capacity into production), or fire workers. Now, to push sales up, you need more consumers; nothing business can do there. And they just got a tax break to buy more equipment. The only choice left is to fire employees. This tax break will result in even more Americans losing jobs.

OK, so the President's program won't help in the short term. Will it have a long-term stimulative effect?

The short answer is no, because his initiative misses the very folks who could help sustain prolonged growth: low- and middle-income workers.

To wit, the President now desires to make permanent the huge, supposedly temporary tax break he recently passed. Recall that roughly 43% of the dollar benefit of this tax giveaway goes to the wealthiest 1% in our country. While that's great for them, it simply won't stimulate the economy long term.

That's because two-thirds of our country's economy is consumer spending. The best consumers are not the rich; they can afford to save. Low- and middle-income folks tend to spend any extra income they get, because they have a lot of needs. Putting extra money in their pockets is the way to foster long-term economic growth.

Giving a huge tax break to the wealthy also ignores what's really happened in the economy over the last 20 years. From 1979 to 1999, the bottom 60% of working America worked longer and harder for less money. On an inflation-adjusted basis, they took home less in 1999 than they did in 1979. During this same period, the wealthiest saw both their pretax and after-tax incomes increase precipitously: After taxes, they're earning 95% more.

Yet, as he slashes federal revenues, Bush is dramatically increasing federal spending - particularly on defense. Obvious observation: This makes the federal deficit worse. In fact, since Bush took office, the large federal surplus that he inherited has transformed into a large deficit, pushing the bills for today's spending off to our children. That is both morally and fiscally irresponsible. The President's ill-informed and poorly targeted tax policy will not only put a damper on the New Year, it may cast a deficit cloud over the entire next decade.