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Jewish World Review Feb. 18, 2000 / 12 Adar I, 5760

Mort Zuckerman

Mort Zuckerman
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Back to the future -- WHAT IS THE REPUBLICAN PARTY to do when the supposedly most ardent anti-tax state in the union, New Hampshire, decisively rejects its tax-cut champion, George W. Bush, and embraces John McCain, whose priority for the budget surplus is debt reduction and Social Security and Medicare, with only modest tax relief? New Hampshire, of course, is not alone–not by a long shot. People may like tax cuts, but by 2 to 1, they tell pollsters, they prefer McCain's approach, and, for that matter, President Clinton's.

The elephant that never forgets should remember Bob Dole in 1996 and congressional Republicans in 1999. Both ran on tax cuts. Both flopped badly. Polls suggest that half the population sees the tax-cut campaigns not as a boon to the middle class–only 13 percent think that–but as Republicans favoring the rich. That happens to be true, for the simple reason that the top 8 percent of earners pay a whopping 62 percent of personal taxes.

Why doesn't the GOP go back to the good old days of fiscal conservatism, when it stood for a budget surplus, debt reduction, and constrained government spending? The answer is: It is still hooked on nostalgia for Ronald Reagan and the sense that he won in 1980 by promising tax cuts. That's a convenient bit of Republican mythology, the perceived convergence of good economics and good politics.

Not the reason. But it wasn't quite like that. Reagan didn't win because he promised tax cuts. He won because the country was fed up with Jimmy Carter. Nor were Reagan's cuts good economics. They didn't trigger an economic recovery. In 1982 and 1983, recall, we were sunk in the deepest recession since 1929, weighed down by the Federal Reserve's sky-high interest rates. They were necessary to crush the inflation Reagan inherited from Carter. It was the decline of inflation that led to Reagan's landslide victory in 1984. Other things helped, of course. He won support for standing up to the air-traffic-controllers union. His marginal rate cuts had some good effects. But what Reagan deserves lasting credit for is not tax cuts but the way he stood by Fed Chairman Paul Volcker when everyone was hurting. Indeed, the tax cuts cannot be mentioned without looking at the effect of the consequent disastrous budget deficit. The federal government took a huge proportion of national net savings and competed with private business for the available pool of capital.

As the recent jump in productivity (5 percent for the second half of 1999) makes clear, what the United States needed was an investment-led economic boom. That's just what we got in the past decade. Business investment doubled, from about 6 percent of GDP to nearly 12 percent. This investment boom was critical to the past four years of 4 percent growth and brought about a dramatic increase in the ratio of capital to labor. That so much of that investment was in high tech was critical to the higher productivity that gave us the "Goldilocks economy"–a period of sustained noninflationary growth. But the investment boom would never have happened without the reduction in the government's take. As the government went from deficit to surplus, it eliminated the demand on available credit from the federal government and permitted a looser monetary policy. The financial markets became convinced that the United States had embarked on a bipartisan commitment to serious fiscal discipline. The remarkable five-year boom on the stock market followed. That, in turn, boosted financial wealth, promoted business and consumer confidence, lifted the housing market, and provided a substantial portion of capital, at cheaper rates, that entrepreneurs needed to invest in new businesses.

Now, incredibly, the Republicans want to risk all this for a rerun of the early 1980s! The arguments from the past are powerful enough–but there is also one for the future. A surplus gives us the flexibility to use fiscal policy if there is an unexpected downturn. The prospect is that we can stabilize the business cycle and lower the risk of a wider or stronger recession–a flexibility that was lacking at the onset of the 1990s, leading to a below-normal economic recovery in those years. Indeed, a fat tax cut would immediately unleash expectations of a possible overheating in an economy that is already at full employment, risking either higher inflation or tighter monetary policy or both.

Hardly good for the Republicans. Hardly good for the economy. Back to the drawing board.

JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


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© 2000, Mortimer Zuckerman