The economy is slowing yet the surplus keeps growing. President-elect George W. Bush wants to use both to justify a big tax cut. How should the Democrats respond? (A) Warn once again that a big tax cut will jeopardize Social Security and that a better use for the surplus is to pay down the nation's debt. (B) Reject any fiscal stimulus and trust Alan Greenspan and the Fed to achieve a "soft landing." (C) Agree with W. that a fiscal stimulus would be useful and appropriate but argue that it should take the form of new spending on education, health care, child care, and public transit rather than a tax cut. (D)Concur with W. that a tax cut is appropriate but demand that it favor poor and working families instead of the rich.
W. doesn't have a prayer of getting his touted $1.3-billion tax cut through the next Congress, of course. Not even the Republican leadership is in favor. But unless Democrats counterpunch with one of the above responses, the betting is that a good-size tax cut will be rolled into the 2001 reconciliation bill that goes to W.'s desk within the year. Which reaction carries the biggest punch? For the past 18 months, Clinton and Gore have used option A above. But A won't wash if the economy keeps slowing and the surplus keeps growing.
Most economists and conventional opinion leaders will favor a combination of items A and B. But there's no particular virtue in eliminating the national debt. This is especially true when the economy is heading south. John Maynard Keynes didn't get everything right, but he at least knew that fiscal austerity was a nasty bedfellow for a contracting economy. It would be a sad irony if the Republican Party belatedly adopted Keynes while the Democrats stuck with Milton Friedman.
Nor does it make sense to place complete responsibility on Greenspan and the Fed to keep the economy running full tilt. Monetary policy is potent, all right, but not nearly as potent as when combined with fiscal policy. And who's to say that Greenspan and company will always properly balance the nation's desire for more jobs with its need to avoid accelerating inflation? The six interest rate increases since June of 1999 should not inspire confidence.
If the policy makers in the new Republican White House want to revive fiscal policy, more power to them. Democrats shouldn't be the ones ceding control of the economy to 12 bankers who by training and inclination err on the side of preempting inflation rather than increasing employment.
The real choice for Democrats comes down to options C or D. Admittedly, C is tempting. Bill Clinton never came close to the "investment budget" in education, child care, and health care he campaigned on in 1992. In fact, as a percentage of the federal budget and as a share of gross domestic product, federal spending on these worthy objectives is lower than it was when W.'s father was in the White House. And despite the booming '90s, the rate of child poverty hasn't diminished, health care is less affordable to more Americans, and schools in poor and blue-collar communities are worse. For the long run, we need more public outlay.
So why not choice C? Two reasons--one economic and one political. First, as important as it is to increase public investment, it's not an ideal way to stimulate the economy because it takes too long--far longer than a tax cut. This is the muddle Bill Clinton got himself into in 1993 when public investment for its own sake got mistakenly pigeonholed as fiscal stimulus. Second, the public doesn't trust government to spend a lot of extra money quickly and to do so wisely. Public skepticism in this regard is not unjustified. If posed as a choice between cutting taxes or spending a lot more public revenue, Republicans win hands down.
We're thus left with option D. And here's what Democrats should be saying loudly and clearly: We hear you W., and we agree that a tax cut may be warranted next year. But not the kind you're proposing. We want a tax cut that primarily benefits poor and working families. The families we care about haven't gotten squat out of this long economic recovery, while the families you care about have made out like bandits. Besides, a tax cut to our families is a more effective spur to the economy than a cut to yours, because our families will spend more of every dollar they get back.
So here's our plan: First, expand the Earned Income Tax Credit by $20 billion a year (retroactive to January 1, 2001). That means an additional $1,800 of income for a working family at the bottom and $500 for one in the lower middle. Second, eliminate all payroll taxes on the first $7,000 of personal income. One of the best-kept secrets in America is that most lower-income taxpayers pay more in payroll taxes than they do in federal income taxes. Shielding the first $7,000 of income would reduce their tax burden $500 to $1,000 a year. Remove the ceiling on Social Security payroll taxes and the net payroll tax cut is about $15 billion a year.
Bottom line: Almost every penny of our total $35-billion tax cut for next year goes to families in the bottom 40 percent of income. This is in contrast to your tax cut, Mr. President-elect, most of which benefits families in the top 5 percent. We can sell ours to the American people better than you can sell yours. In fact, ours may well win back Congress for the Democrats. ¤