Taken together, President Bush's two large tax cuts
are likely to do great harm, but only long after the president has
left office. And for what benifit? A little current demand-stimulation
that could readily be achieved by measures that would do more good
in the near term and cause no damage in the long term.
Much has been said about the effect of the tax cuts
on the books of the federal government: budget deficits, debt, and
the assets and liabilities of the trust funds. It is as though what
mainly mattered was the effect of the budget on the budget. It's
the wrong focus.
Decisions about taxes, public spending, and the
supply of money are in effect choices about national output and
employment, and about how the output is divided between private
and public uses, and between consumption and investment. They also
affect the distribution of income.
Put aside the possible need for near-term demand
stimulation. The likely durable effect of the tax cuts will be to
slow down growth in the supply of goods and services available to
Tax cuts increase taxpayers' after-tax incomes.
Taxpayers typically spend some of the extra income on consumption.
Unless the government reduces its spending on consumption dollar-for-dollar,
total consumption, private plus public, will be higher. Barring
a supply-side miracle (a reckless gamble), the share of output left
over for investment will be smaller.
Less output will be available, over all, for increasing
or improving the stock of infrastructure, housing, and business-owned
plant and machinery, for enhancing the skill and health of workers,
for research that adds to usable knowledge, and for adding to American-owned
wealth abroad by way of a surplus of exports over imports.
Because the president's tax cuts will almost certainly
reduce national investment, the economy's capacity to produce output
for our own use will grow more slowly. As a result there will be
less output available in 15 to 25 years, precisely when more output
will be most needed - when our relatively few grandchildren who
will produce it will have to share it with our many retired baby
Reshuffling Social Security finance will not change
that - not unless it reduces the share of output absorbed by consumption.
(I leave aside the possibility of a large influx of immigrant workers.)
Preoccupation with the effect of the tax cuts
on the budget is likely to cause us to compound the damage.
If, for example, we shrink the deficit by cutting
federal spending on research and public health, or on grants to
state and local governments that subsidize their spending on education
or infrastructure - in other words, if we skimp on government
investment - we will retard growth.
The president seems to believe that most nondefense
public investment is "waste, fraud and abuse." He is
mistaken. To take an obvious example, much private investment
requires, for its own productivity, streets and roads that are
largely the product of public investment.
In our political debates we typically argue about
taxes, government spending, and high or low interest rates as
though they were bad or good in themselves, in no relation to
what allocation of the national product we want those policy instruments
Yet, there are choices to be made here, not about
deficits or debt as such, but about the best use of our labor
and material resources.
For the near term, and also for the longer run
future, how much growth in demand, and therefore output and employment,
should the policy-makers aim for, with what margin of safety against
inflation? How much consumption would we have to forgo to make
room for the investment that would be needed? How much of the
investment should go into new business plant and equipment, into
housing, into more and better public infrastructure, into research
and education? How should the output left over for consumption
be divided between provision of private goods and of public services,
and between the consumption of the well-to-do and what is left
over for the chronically poor?
Neither the president nor his senior advisers
seems to have confronted any of these choices. One has to wonder
whether they have even understood them. Instead they bamboozle
us, and most likely themselves, with slogans. Yet, whatever the
government does about its budget - and the Federal Reserve about
money - will powerfully affect the outcome.
Francis M. Bator, former deputy national security
adviser to President Lyndon Johnson, is Littauer professor emeritus
at Harvard's John F. Kennedy School of Government.