It was never clear to me why Alan Greenspan was supposed to approve of cutting dividends taxes and widening the deficit (although he would surely approve of cutting dividend taxes in a deficit-neutral manner, either through spending cuts or other tax cuts). It was never clear to me why the Republican center was supposed to think that the Bush proposal was an economic stimulus. Now it becomes clear that it wasn't clear to Alan Greenspan or the Republican center either.
Posted by DeLong at January 26, 2003 09:35 PM | TrackbackWSJ.com - Dividend-Tax Cut Plan Draws More Fire From Friends, Foes: ...Speaking privately to a group of senators Thursday, Mr. Greenspan said the U.S. economy is recovering without additional fiscal stimulus. In any case, he said Mr. Bush's proposed $670 billion of tax cuts would provide the economy with little near-term effect...
...Meanwhile, Republican skepticism of the dividend cut appears to be growing. "Surely you could come up with a better stimulus than that," said Sen. Pete Domenici (R., N.M.). Many House and Senate Republicans would prefer to shorten depreciation schedules to stir business investment. Democrats and Republicans both support a bigger write-off for small businesses through an expensing increase. Another bipartisan priority is altering the alternative minimum tax -- a flat tax that kicks in once deductions reach a certain level -- before it ensnares millions of middle-class taxpayers.
I get the feeling that there are growing tensions between the President and Republicans in Congress. Their political objective simply don't match as well as they did before the midterm elections.
Bush is probably already concerned with pleasing big campain donors, and thinks he will win on "It's the war, stupid" platform. He is probably hoping that the war will provide a Keynesian boost to the economy.
State representatives, on the other hand, know they will be judged primarily on the state of their local economy. They also care less about casting a uniform "compassionate conservatism" image, and thus support initiatives and nominations that are not necessarily to the liking of Karl Rove.
Of course, this has allowed the Democrats to creep back on the center stage on their favorite issues. Thus, the rush to war on Iraq (both practically and as a matter of press releases) to quickly redifine a media landscape where Democrats are expected to feel awkward (how much longer is an issue, however). And the need for Republicans as a whole to stalemate any health care reforms by arguing that THEY care about it and THEY know what to do (policy substance is secondary matter.)
Posted by: Jean-Philippe Stijns on January 27, 2003 12:07 PMBy the by -
Glen Hubbard
Nightly Business Report - PBS
"As to the boon for the rich, you know, tax cuts on dividends are not about buying jewelry at Harry Winston. They're about the cost of capital for investment and promoting jobs and that's why the President is for this."
Posted by: anne on January 27, 2003 12:39 PM>>"Surely you could come up with a better stimulus than that," said Sen. Pete Domenici (R., N.M.)....
Many House and Senate Republicans would prefer to shorten depreciation schedules to stir business investment. Democrats and Republicans both support a bigger write-off for small businesses through an expensing increase... etc., etc. <<
Do We Really Need More Stimulus?
-- by C. Eugene Steuerle, formerly of Treasury, now at the Urban Institute, writing at Tax Analysts, www.tax.org
Both the president and members of Congress have expressed strong political desire to appear to be "doing something" about the past recession and current unemployment rate. This sentiment cuts across political parties and between the executive and congressional branches of government.
In truth, however, few economists in the administration or in Congress, Republican or Democrat, have made much of a case that more stimulus -- at least in terms of putting money in the economy -- is needed or wanted at this time.
Why? As far as I can tell, never before in the nation's history has so much fiscal stimulus been provided relative to the size of a downturn.
While the typical change in fiscal position (or increase in deficit) might be 30 to 40 percent of the size of an economic downturn, this time it appears to be one to two times larger than the downturn itself! That is, the government has absorbed more than the entire loss of income to the population. And that doesn't count any new bill enacted this year.
According to the Congressional Budget Office figures (soon to be updated) in fiscal 2003 alone, recently enacted tax bills have reduced collections by $126 billion. Discretionary spending has been raised $72 billion, and other changes (largely interest costs on other tax and spending changes) will raise legislative changes to $238 billion.
In addition, we can approximate the direct impact of the economic slowdown on government activity simply by examining nonlegislative changes in estimates of the government's deficit position. Here we find another $286 billion, largely in lost revenues, due to reductions in such items as taxes on wages, capital gains realizations, and exercises of stock options. The natural reductions in the taxes people pay on their reduced income are the primary component of what is referred to as automatic fiscal policy, which is usually much larger than discretionary actions.
The total decline in fiscal posture for 2003 alone comes to around $500 billion. Compare this to the size of the economic decline.
So far the numbers indicate that the effect of the downturn on the economy was very mild. Real economic growth in 1998 was 4.3 percent, in 1999, 4.1 percent, in 2000, 3.8 percent, and in 2001, 0.3 percent. Then in the first three quarters of 2002, growth was 5.0 percent, 1.3 percent, and 4.0 percent, respectively, although it may be back around zero for the fourth quarter...
[T]he total decline from the beginning of 2001 to the end of 2002 might be about 2 to 3 percentage points of GDP. With an economy of a little more than $10 trillion, this implies that the nation's income is about $200 billion to $300 billion below potential in 2003.
Next, compare the change in fiscal policy with the size of the recession. It turns out that the combination of revenue shortfalls due to the recession, new tax bills, and new discretionary expenditures are on the order of one to two times the size of the decline so far...
Given all this money floating around, it is hard to argue that the nation needs additional stimulus -- at least if by stimulus one means more fiscal deficits to put cash in the economy.
One might argue that there are useful changes in structural tax or expenditure policy that would increase the nation's output and efficiency. That is a different debate and, really, the one that we ought to be having.
As long as politicians need to prove they are stimulating the economy and putting money into it, however, the debate will remain confused as to whether this structural reform is a stimulus or not, and financing the change by deficit spending will be hard to resist.
Posted by: Jim Glass on January 28, 2003 11:01 AM