While we were on winter break, watching TV and making snow angels in the front yard, President Bush’s chief political adviser, Karl Rove, must have been hard at work. Rove probably spent a good part of the holidays deciding on an economic stimulus plan for Bush to promote in the next session of Congress. Moderate or conservative? How much? If Bush supported capital gains tax cuts and more tax cuts for the wealthy, he would satisfy Wall Street brokers and the rest of his conservative base, but risk overreaching like Newt Gingrich did in the mid-’90s. If Bush promoted middle-class tax cuts and a recovery package for the states, he might pull in swing voters for 2004 and even fulfill Rove’s dream of creating a national Republican majority like the one Ronald Reagan presided over. Yet, in doing so Bush would risk making the same mistake his father made and alienating his conservative base. Well, February has begun and Rove has made his decision: a conservative economic stimulus package with some moderate trimmings.
Bush wants an end to the double taxation of stock dividends, an acceleration of the 2001 tax cuts, extension of federal unemployment benefits, and a small stimulus package for the states. The last two parts of the plan do offer some short-term stimulus but the most expensive part of the plan — the dividend tax repeal — comes straight out of Ronald Reagan’s playbook. Supply-siders like Reagan celebrated the Laffer curve in the ’80s, which holds that big tax cuts will boost government revenue enough to shrink deficits. Bush believes that his supply-side remedy would reduce revenues by $670 billion over 10 years, but revive the economy by encouraging private sector investment. Business investment, however, has been especially sluggish because of corporate scandals, the war on terrorism, and possible war with Iraq. Investment will continue to lag until consumers buy up the excess inventories sitting on the shelves now. The Federal Reserve can’t jumpstart the economy after 12 interest cuts because of the tremendous amount of unused productive capacity. Sure, more productive capacity is the key to long-term economic growth, what incentive do businesses have to invest in more capacity and equipment if none of their products will be bought? Why print a thousand baseball tickets if you’re expecting a dozen spectators? The solution to the problem of depressed consumer spending is a generous demand-side stimulus.
A payroll tax cut, combined with a relief package for the states, make a great alternative to a supply-side plan. Conservatives claim that the poor pay no taxes, yet the payroll tax takes away a big chunk of income from middle-class and poor families. Cutting this tax would give relief to those who need it most, and the cash would be spent immediately. Republicans have argued that reduced payroll tax revenue will threaten Democrats’ precious Social Security “lockbox,” but it’s just a label. All the federal tax dollars collected look the same. Not repealing the dividend tax would make up for the lost revenue in a payroll tax cut. Plus, employers would longer have to pay their share of the payroll tax and would have an incentive to retain workers. Former Clinton Labor Secretary Robert Reich and Sen. John Kerry have already advocated a payroll tax holiday as way to soak up excess inventories so investment will pick up. Instead of Karl Rove’s version of Reaganomics, why not have an economic policy that actually works?
John Coggin is a sophomore in Silliman College. He is campus coordinator for the Yale College Democrats.