New York Times October 7, 2001
Fuzzy Math Returns
By PAUL KRUGMAN
P ost-terror nerves aside, what mainly ails the U.S. economy is too
much of a good thing. During the bubble years businesses overspent on
capital equipment; the resulting overhang of excess capacity is a drag
on investment, and hence a drag on the economy as a whole.
In time this overhang will be worked off. Meanwhile, economic policy
should encourage other spending to offset the temporary slump in
business investment. Low interest rates, which promote spending on
housing and other durable goods, are the main answer. But it seems
inevitable that there will also be a fiscal stimulus package.
That package should include only measures that really will promote
spending now, when the economy needs it. It shouldn't include anything
that worsens the long-run budget position more than is necessary, or
anything that looks like "hitchhiking," exploiting the short-run
difficulties of the economy to pursue unrelated long-run goals.
Unfortunately, the Bush administration has just taken a big step away
from those principles.
Until late last week it looked as if much of any stimulus package
would consist of increased government spending to rebuild New York, to
pay for military operations and to provide unemployment benefits. This
would put money into the economy in a clearly temporary way.
Giving money to lower-income families would also be sensible. The
problem with temporary tax breaks is that you can't be sure people
will spend them; in fact, the much-vaunted rebate seems to have gone
mainly into the bank rather than the economy. The chances are better
if the money goes to poorer people, whose spending is often
constrained by simple lack of cash.
But the big-ticket items in the stimulus proposal sketched out by
administration officials on Thursday, and reaffirmed by George W. Bush
after a meeting with Congressional hard-liners, are thoroughly
wrongheaded and they suggest that bipartisanship is over, that we're
back to the cynical budget politics of the past.
One key proposal is a permanent new tax break for business investment.
This violates the basic principle that stimulus proposals should be
only short-term. Furthermore, it would probably have only a modest
effect on business investment now, when there is excess capacity; but
it would increase long-term interest rates, by increasing both future
deficits and future business borrowing. And since long-term interest
rates are what matter for housing, on balance this measure might well
delay recovery instead of promoting it.
Another key administration proposal is an acceleration of tax cuts for
higher income brackets that under current law are not scheduled to
happen for several years. On the face of it this idea seems bizarre:
it gives money to precisely the people who are least likely to spend
it. Is this just a case of knee-jerk conservatism, of the belief that
tax cuts for the affluent are the answer to all problems?
Alas, no: it's worse than that. The real reason to accelerate the Bush
tax cut is surely to forestall the growing likelihood that part of
that tax cut will eventually be rescinded.
Over the last couple of months the long-run budget outlook has
darkened dramatically; we've gone from arguments about whether the
Social Security surplus would be raided to the prospect of deficits
plain and simple as far as the eye can see. A natural response, once
the slowdown is over, would be to cancel some or all of the tax cuts,
mainly for upper brackets, that are scheduled to happen in 2004 and
beyond. As a political matter, that will be much harder to do if the
cuts have already gone into effect.
And that, surely, is why the administration wants to accelerate the
tax cut. It's being billed as a short-run stimulus proposal, but it's
really a case of covert hitchhiking.
To add to the insult, a preliminary analysis of the numbers suggests
that fuzzy math is back: the administration appears to be greatly
understating the true budget cost of its proposals and pretending that
a package that consists overwhelmingly of tax cuts is evenly split
between tax cuts and spending.
As far as one can tell, the ultimate shape of the fiscal stimulus
package is still fluid. The package that eventually emerges could be
genuinely designed to help the economy, or it could be mainly a
vehicle for political opportunism. Sadly, the latter possibility has
just become much more likely.
Copyright 2001 The New York Times Company