The increasingly severe economic downturn offers a fresh basis to reconsider President Bush's tax plan. For starters, it's the wrong kind of tax cut. For reasons of budgetary sleight of hand, most of the benefits would occur in future years. But we need a strong economic stimulus right now.
By contrast, President Kennedy's tax cut, which conservatives love to invoke, was front-loaded.
Second, most of the benefits go to the wrong people - very wealthy ones who will save rather than spend the proceeds of their tax break. Whatever is afflicting the economy at this moment, it is not a shortage of savings. On the contrary, there is plenty of investment capital around.
But in a downturn, capitalists are pulling in their horns. So the stimulus we need should be on the demand side - consumer spending.
Investors, if anything, were overly credulous in the booming 1990s. They were easy marks for stock promoters and backed a rash of unneeded ventures that are now collapsing. For the long term, America may indeed need a higher rate of household savings to underwrite investment - but that's not the problem right now. The last thing we need in a recession is more saving.
Third, even though the Federal Reserve should indeed cut interest rates, in this kind of downturn there are limits to the Fed's powers. If investors are chastened, consumers hunkered down, and profits tumbling, lower interest rates by themselves will not induce corporations to invest capital. In Japan, facing a far more serious collapse, monetary authorities cut interest rates all the way to zero, and it still didn't help.
Finally, a serious economic downturn suggests that the prodigious 10-year budget surplus may end up well below projections. It is therefore wildly imprudent to give so much of it away - least of all through permanent rate cuts.
What, then, to do?
First, the tax cut should be smaller, quicker, and directed to people who need it. The best idea, proposed by Harvard's Richard Freeman and the Economic Policy Institute, is a one-time dividend of $500 for every woman, man, and child. That would inject a lot of stimulus into the economy right now. The Treasury could send out checks within a month.
Unlike the Bush plan, which permanently cuts rates with most of the benefit going to the top, this would be a one-time dividend for everyone. It would cost $270 billion rather than $1.6 trillion.
This approach would stimulate the demand side of the economy now, rather than waiting to see how interest rate cuts work. Typically, interest rate cuts take as long as a year to cycle through the economy.
A further virtue of this strategy is that it lets us wait to see whether economic growth returns to the rates of the 1990s, before permanently altering the tax system. We should address tax cuts one year at a time, instead of blowing a huge hole in the government's revenue base for all time.
Therefore, there is a respectable case again for the use of fiscal policy to moderate the economy's booms and busts. Until lately, most economists had written off the selective use of surpluses and deficits as wrongheaded and defunct. Instead, monetary fine-tuning was supposedly all the policy intervention we needed. But this happy premise, along with the assumption of permanent, high-tech prosperity, has been overtaken by events.
The economy needs a big fiscal stimulus. What we should really be debating is whether that stimulus best takes the form of tax cuts or increased public spending. This, of course, is a political choice, not a fiscal one.
Most Americans, according to polls, would rather see the surplus spent on things like smaller classrooms, better child care, more reliable health care, and needed benefits like prescription drug coverage. If part of the package is to include a tax cut, it should be tilted downward, not upward. This is the real national debate we should be having.
Until last week, the ill-advised Bush tax cut was greased for the fast track. The House Republicans rammed it through without even bothering to consult the president's conservative Democratic allies, who felt wounded that he didn't need their votes.
The Senate, which is split 50-50, has mercifully slowed things down. There, the tax bill won't come up before May. Given a little gumption and leadership from the shell-shocked liberals, we can still have that national debate.
