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Jewish World Review Sept. 5, 2000 / 4 Elul, 5760

Amity Shlaes

Amity Shlaes
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Consumer Reports

Prudent Al Gore plans some serious spending

The vice president's tax plans may seem admirably cautious, but voters should pay attention to his expenditure ambitions -- ECONOMICS MOVED centre-stage this month in the US presidential campaign, with Al Gore taking the role of Father Parsimony, the Guardian of Good Times. Vice-President Gore promises that, if elected, he will both balance the budget every year and pay off the national debt.

He casts George W. Bush as a dangerous hotdog, poised to "wreck our economy" with a $1,300bn tax cut spread over 10 years. The Bush plan is "a risky scheme", the word "scheme" being a pejorative in American English. Its evils, he says, are numerous: it cuts rates at the top of the income tax schedule, a sop to the wealthy; it represents an ill-timed fiscal stimulus; worst of all, it threatens the new-found surplus.

Nor is Mr Gore the only Democrat engaging in debt theatrics these days. Hillary Clinton this weekend assailed Rick Lazio, her Republican opponent for the vacant New York Senate seat, as "fiscally irresponsible". For his part, President Clinton set the stage for a new era of fiscal rectitude back in January, declaring: "Let's make America debt-free for the first time since 1835!"

The party has good reasons for putting on this show. To the Democratic mind, Mr Gore's 1996 charge that the Republican tax cut plans would "blow a hole in the deficit" helped President Clinton to trounce Bob Dole. The assault has so flummoxed Mr Bush that he recently said he had to learn to explain his economic programme better.

It is true that just about any talk of budgetary balancing, low interest rates, and the health of the economy resonates in the US today. Over the past decades, the federal government has repeatedly raised taxes in the name of narrowing the deficit, and voters long to deprive Washington of its excuse. Wall Street, meanwhile, worries about whether foreign investment flows will continue. Without funds from abroad, America must be in good enough shape to generate investment itself.

Still, there are serious questions about the Democrats' programme. The first are economic ones. Everyone agrees on the importance of capital investment and increasing savings. But, as Japan has shown, low interest rates alone cannot sustain a powerhouse. And governments, like businesses, often find debt a useful tool. Moreover, not everyone subscribes to the notion that big tax cuts are bad during expansion. Among the most prominent expansion-period tax-cutters was John F. Kennedy, referred to by Mr Gore in his talk of the "new frontier". President Kennedy backed dramatic tax cuts because he thought they would boost a growing economy. They did.

But even if we accept the Democrats' reasoning, there is still a problem. It is that their plans contradict themselves. The party may enjoy posturing as fiscally pure but it is also backing spending plans so broad that they are likely to do considerable damage to the fiscal household. Nor are party leaders offering any of the growth-generating measures that the world of capital looks for.

The contradiction was dramatised in Mr Gore's convention speech. In his 51 minutes at the podium, he called for zero debt and outlined spending so generous it would cost five times as much as Mr Bush's proposals. The Gore plan is so expensive it would, to borrow his own term, "blow a hole" in the surplus.

Consider the campaign platform, as parsed by the anti-tax but non-partisan National Taxpayers Union. On education, Mr Gore plans to launch a head start programme for all American pre-schoolers, spend liberally on charter schools, and increase student testing, a regime that would cost $41bn over the decade. His healthcare plan would cost $77bn, much of the cash going to universal coverage for children. (This would mean toddlers joining senior citizens in the crowd whose healthcare is funded by Washington). Prescription drugs for seniors, another new entitlement, plus some other Medicare expansions, cost $45bn. The NTU believes the entire plan would generate a deficit of $161bn.

Nor is Mr Gore alone in his contradictions. President Clinton has this year widened his budget proposal to a 12.5 per cent increase in spending compared to the previous year. Congress, which has marching orders to avoid an election year slowdown, is not likely to resist. Larry Lindsey, a Bush adviser who formerly sat on the board of governors of the US Federal Reserve, says the Fed would need to raise interest rates one percentage point to offset the spending. The spending would naturally come before elections; the interest rate rises afterwards. These facts ought to interest the crowd that operates with an eye to the yield curve.

Perhaps the worst news about the Democrat plan for the economy is that it contains little that would encourage that economy to continue growing. Mr Gore plans research and development credits but that is the sum of the story. His own income tax cuts are targeted entirely to middle earners, which means they have close to zero macroeconomic impact. By contrast, the Bush plan actually contains two steps to encourage capital investment. Mr Bush would like to abolish America's inheritance tax. This is by definition a tax on capital, and removing it would allow family businesses to expand. The same holds for his marginal income tax cuts, which would allow America's highest earners to save more. Mr Bush could do more - propose capital gains cuts, for example. But the two measures alone, which are dismissed by Mr Gore as pointless giveaways, could strengthen investment and boost America's relative competitiveness.

Mr Gore's defenders argue that the disparity between his debt and his spending plans need not be taken too seriously. After all, campaign players must act the populist occasionally, and promise more than they can deliver. But the least we can do for a candidate - particularly one with as serious a sense of purpose as Vice-President Gore - is to take him at his word.

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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© 2000, Financial Times