“The hogs were really feeding.” That’s how Reagan Administration Budget Director David Stockman described congressional pandering to special interests when he drafted the Great Communicator’s tax cut bill nearly 20 years ago.
Stockman, a true believer in supply-side economics, wanted to reduce taxes carefully and selectively, with an eye toward improving incentives for long-term economic growth.
Like the police inspector in Casablanca, Stockman was shocked, shocked, that some Reagan supporters and campaign contributors just wanted to pay less in taxes and couldn’t give a hang about long-term effects for society as a whole.
If Stockman had been in Washington the last couple of weeks, he would have seen much that was familiar. Members of both parties have been quick to push benefits for their particular constituencies or campaign supporters into the general rubrics of “economic stimulus” or “homeland defense.”
The most outrageous example of this is the initiative by some House Republicans to retroactively eliminate the Alternative Minimum Tax for corporations. “Retroactively” means they want to refund every dollar paid under this tax provision since Ronald Reagan signed it into law 15 years ago.
One can make an economic argument that nearly every tax contains some perverse incentives that reduce savings or investment. But no economist believes that this kind of refund would have any impact on future behavior. Firms made decisions for 15 years based on the tax structure as it stood.
Giving $25 billion in refunds now will do nothing to change those past decisions. It is merely a gift to large political donors, such as Enron, which one conservative analyst has calculated would get a 100-fold return on the contributions it made to Republicans for the 2000 elections.
It is encouraging that conservative organizations and media, such as the Cato Institute and The Weekly Standard, have vocally opposed this measure. They know that any retroactive tax cut is a response to greed and not supported by any conservative principle. They correctly recognize that this is the sort of thing that can give conservatism a bad name.
Another initiative that is silly, though not dangerous, is the call for a new war bonds campaign. Yes, our country is at war in some sense. But there is no indication that the government will need to run large budget deficits to finance the war effort.
During World War II, that was not true. Defense production took up a huge fraction of total output. Government borrowing was necessarily substantial. Virtually every able-bodied adult was employed and earnings were high.
With fewer consumer goods available, the government had to do something to sop up all the war boom money flowing to households. If they did not, inflation and black markets would inevitably result.
That is not true today. There isn’t any excess liquidity that needs to be absorbed. The government can easily borrow whatever it needs in ordinary capital markets. It would be counterproductive to reduce consumer spending in a slowing economy. There is no reason, other than some rah, rah, rah sentimentality to run war bond campaigns.
There are many pressing issues facing the nation. Congress should and could take action on many of these. It should not waste its time on unjust and economically inefficient tax refunds or on empty symbolism such as war bonds.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.