Jewish World Review Jan. 11, 2002/ 27 Teves, 5762
http://www.NewsAndOpinion.com -- TOM DASCHLE has made a riverboat gamble, and he stands to lose his political shirt. The Senate majority leader actually believes that the nation's voters will buy his argument that higher taxes will solve the recession -- and that lower taxes are the cause of it. This defies economic theory. Voting Americans will not buy it. They're too smart, and the Daschle argument is, well, rather dumb.
Backed by his adviser (and former Clinton Treasury Secretary) Robert Rubin, Daschle claims that George W. Bush's tax cuts of spring 2001 are responsible for a budgetary swing from surplus to deficit. This is essentially nonsense. Recession is the principal cause of a lower cash flow to the government, as it always is. When people lose jobs and businesses lose money, they pay fewer taxes. Hence, federal tax revenues contract. And surpluses evaporate.
Today, the recession-related loss of tax revenues accounts for more than 50 percent of the surplus reduction. Nearly 20 percent of the surplus decline comes from higher spending. In static revenue terms, the Bush tax cut is projected to pull a mere $38 billion from this year's fiscal receipts. This will add only 11 percent to the surplus drop. No, Mr. Daschle, the president's tax-cuts have not ushered in the era of surplus decline.
More, attaching this recession to Bush -- another Daschle maneuver -- is the height of silliness. Let's review the timeline: The recession officially began in March, less than two months after Bush took office. Blame Clinton. Blame the Fed. Blame OPEC. But don't blame Bush. In terms of the stock market, business production, and profits, it actually began near the middle of 2000, seven months before Bush took office.
But Daschle stumbles on. He is even arguing that the United States has moved into the worst fiscal condition in its history. Oh yeah? Even if we run recession deficits of $50 billion in 2002 and 2003 (and the House and Senate budget committees don't think the budget gap will be that wide), it will still be less than half of 1 percent of GDP. In other words, this recession will result in a relatively puny hit to federal cash flow. Most recent recession cycles have produced deficits that run between 3 percent and 5 percent of GDP; the recession deficits projected today will probably be the lowest since World War II.
Moreover, according to Senate figures, even with the recession, surpluses over the next 10 years are likely to run just south of $2 trillion in total. That's not a bad haul of tax overpayments, even for Daschle.
Then there's the Rubin argument that we should run surpluses all the time, even in recessions, in order to get long-term bond rates down. This is a tax-raising Herbert Hoover strategy -- or, in current parlance, it is a Japanese strategy. Recession-prone Japan has a 1.5 percent long-bond rate, and they also have the most massive build-up of yearly deficits and cumulative debt in the history of man.
An honest Keynesian, much less a supply-sider, would today argue for an additional $150 billion for spending or tax-cut measures to stimulate recovery. Supply-siders, of course, prefer tax cuts. Yet tax-cut recommendations from places not necessarily known as supply-side havens are now popping up. Just recently, the Paris-based Organization for Economic Co-operation and Development (OECD) recommended a return to Ronald Reagan's 28 percent tax rate. And a recent study by the non-partisan Cambridge, Mass., based National Bureau of Economic Research proved empirically that lower personal tax-rates would promote greater small-business growth, leading to higher tax receipts for the federal government. Note to Daschle: America is talking tax cuts, as are academics on both sides of the Atlantic ocean.
Daschle is digging the Democratic Party into a political hole. His plan -- which seeks to raise unemployment compensation and health-care benefits -- is aimed narrowly at the nation's unemployed, or 6 percent of the American pie. He's got nothing to say to the 94 percent who are working and investing in the private sector. His is a McGovernite approach, and it would pull the Democrats hopelessly to the left. No wonder Democratic Sens. Zell Miller, Tim Johnson, Max Cleland, Jean Carnahan, John Breaux, Mary Landrieu and Dianne Feinstein disavowed Daschle within minutes of his speech.
Completely unlike his father, President George W. Bush is totally committed to vetoing any Daschle attempts to rescind the tax cuts passed last spring. That's what the president meant when he recently declared in Portland, Ore., that Congress will raise taxes "over my dead body." George Bush has taken off the gloves to fight Daschle -- and it's a fight that will pay huge Republican dividends in this year's midterm
JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.