The Bush Bear Market?
As soon as the U.S. Supreme Court chose George W. Bush as our next president, the stock market fell precipitously. Wall Street analysts who had been loudly insisting on the need for a Bush victory suddenly began to find all kinds of new reasons for the market's problems--poor corporate profits, weak consumer spending, energy price jumps, and high interest rates, among others. All plausible. But few analysts were willing to admit the obvious: Bush's plans to reverse the tight fiscal policies of the Clinton years with big upper-income tax cuts and hugely expensive privatization of Social Security have made Alan Greenspan and the Federal Reserve more reluctant to cut interest rates.
To be sure, 2000 was a rotten year for stocks all around. But the Fed's refusal to lower interest rates in December precipitated a major additional market sell-off. In just the first week after Bush was certified by the Supremes, the NASDAQ index fell by 19 percent, the Dow by 5 percent, and the S&P 500 by 7 percent. While we will almost certainly see some Fed action to cut rates starting early in 2001, the reductions will probably be less than what the economy and the stock market need because of Bush's profligate economic program.
We've seen this play out before. In 1981, after Ronald Reagan's deficit-expansion plan was enacted, the Fed jacked up interest rates and unemployment hit its highest level since the 1930s. Only after Bob Dole persuaded Reagan to roll back a big chunk of the tax cuts in 1982 did the Fed relent and let the economy recover. Conversely, Bill Clinton's deficit-reducing tax increases of 1993 set the stage for a series of interest-rate cuts that helped produce the longest economic and stock market boom in history.
What we could have learned from these experiences is that coupling prudent fiscal policies with relatively loose monetary policy is a pretty good prescription for a healthy economy. But cheered on by his partisans on Wall Street who seem blinded to their own self-interest, Bush is hell-bent on taking the opposite course.
What is it about styling government subsidies as tax breaks that so often causes lawmakers, especially Republican ones, to lose all perspective? We saw a classic example back in 1995, when House Speaker Newt Gingrich suggested that the federal government give every poor family in America a 100 percent tax credit to buy a laptop computer. The $25-billion price tag didn't fluster the usually anti-spending Gingrich.
Likewise, newly elected Virginia Senator George Allen, a Republican, built his campaign around a proposed $1,000-per-child tax credit for middle- and high-income families with school-age children, the idea being that the money had to be used to buy "school-related" items such as computers, printers, and Internet service. This wasn't a $23-billion-a-year entitlement program for the better-off, Allen insisted, but was merely "letting the taxpayers keep more of their own money."
And then there's Arizona's recently aborted boondoggle that tried to curb pollution through tax credits. Last April, at the insistence of Republican House Speaker Jeff Groscost, the state passed a law offering huge subsidies to people and companies that bought low-emission vehicles or converted existing ones to use cleaner fuels. The program involved both a direct-rebate program that was carefully capped at 2,700 applicants and a refundable tax credit that was entirely open-ended.
When enacted, the subsidies were estimated to cost between $3 million and $10 million a year. But once Arizonans figured out that the state would in many cases pay for half the cost of a truck or sport utility vehicle--including the leather seats and the CD players--tens of thousands of people ordered vehicles and lined up for their tax credits. As a result, the projected cost skyrocketed to $680 million--more than 10 percent of the state's entire budget! What's more, the supposed low-emission vehicles only had to be capable of using alternative fuel; running them on regular gasoline was okay, too.
When Arizona lawmakers discovered the enormous drain created on the state treasury, they reversed course and passed a semi-retroactive repeal bill that they claim will lower the cost of the subsidies to $200 million this year. And Arizona voters rejected Groscost's campaign for a state senate seat in November by a two-to-one margin. That's an excellent reaction. But when will our lawmakers learn that tax-based spending programs need to be scrutinized at least as carefully as direct appropriations--and that, in fact, larding up the tax code with costly "incentives" is usually a very dumb idea?
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