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TIMES BOARD OF ECONOMISTS / GEORGE L. PERRY

The American Economy Needs Clinton's Tax-and-Cut Budget Package

May 16, 1993|GEORGE L. PERRY | GEORGE L. PERRY is a senior fellow at the Brookings Institution, a research organization in Washington, D.C

As everyone knows by now, the new Administration did not manage its agenda well in its first hundred days. The inability to break the Republican filibuster against the President's stimulus package surprised everyone at the time. Now some observers believe that the whole economic program is in trouble. Is it? And would it be better for the economy if it were?

The answer to the first question is almost surely no. The long-run economic program called for reducing future budget deficits through a combination of raising some revenue and lowering the path of future spending, while rearranging priorities in the budget by spending less on defense and more on domestic needs, primarily on education, training and infrastructure investment. Although Congress will modify the President's specific proposals, there are at least two good reasons to believe that the main thrust of the program will survive.

First, Congress is constrained by budget ceilings placed on total discretionary spending for fiscal years 1994 and 1995. The old Gramm-Rudman targets for budget deficits represented an unworkable idea that turned into a joke. The current ceilings put enforceable limits on those parts of the budget that are not required by law to respond automatically to caseload, like the number of Social Security recipients, or economic conditions. Although the law does not address budgets beyond 1995, the President has indicated that he wants ceilings extended through 1998, and Congress will oblige him.

Second, the Democrats in the House and Senate are not about to abandon their President in response to pressure from the minority Republicans. They have a big stake in having him succeed and voted to accept his March request to raise additional revenue as part of deficit reduction. Republicans are likely to try to make political points with their customary attack on raising taxes under any conditions.

If the House and Senate can achieve the President's deficit targets through other changes in the budget, they can scale down the revenue proposals; and they can substitute other taxes for the ones he proposed.

But that is about all the leeway they will have unless the majority Democrats allow the Republicans to undo the whole deficit reduction effort. And unlike the stimulus package, the long-run economic program will be voted on under procedures that will not permit it to be killed by filibuster.

As to whether the economy would be better off without the President's program, the answer is again no. There is, by now, broad agreement that our budget deficits have been too big for a decade. President Clinton's plan is a realistic way of containing future deficits, and that in itself makes it good economics for the longer run.

Complaints about the modest tax increases he has proposed should be seen mainly as complaints about who should have to pay more taxes--every affected firm and individual believes that it should be someone else--not as serious arguments about whether these taxes hinder the nation's long run prosperity.

But what about the near term where, after a strong fall and winter, the economic indicators have turned mixed again in recent months, leading to some renewed concern that any increase in taxes and any fiscal restraint can only hurt an already unsatisfactory and fragile economic recovery? Such uncertainty about the strength of the expansion may well continue for some time, but it is not a reason for jettisoning the President's long run goals for deficit reduction.

There are two avenues for dealing with the apparent conflict between strengthening the expansion and tightening budget policy for the longer run.

The first is to provide enough support from monetary policy to offset any drag on the expansion induced by tightening budget policy. There is every sign that Alan Greenspan and his colleagues at the Federal Reserve are prepared to provide such support.

They seem to have a greater rapport with this Administration and its economists than with the administrations that appointed them, presumably because they share this Administration's goals for long-run deficit reduction.

The second has to do with timing the budgetary changes. The stimulus package was the part of the President's overall economic plan that dealt with the need to strengthen the expansion right now.

With unemployment high and capacity utilization low, one does not need a guarantee that the expansion will falter in order to welcome immediate fiscal stimulus. It is enough to recognize that the balance of risks lies with doing too little. For this reason, the economic case for the stimulus package was strong, and the Republicans who killed it with their filibuster were playing politics at the expense of the nation's economic health.

It would be good economics, though perhaps risky politics, to try again to pass a stimulus package. But if that is not feasible, there is one feature of the long-run package that should be changed right now as a way of helping the economy near term without undermining the long-run budget plan. The proposed increase in upper bracket tax rates is scheduled to be effective as of the start of 1993. That effective date would result in $20 billion of higher tax payments next April, when this year's tax liabilities come due. By moving the effective date for these proposed tax hikes to next year rather than this, the President would avoid the damper on consumer spending from these higher taxes next spring. It would even add to consumer demand right now to the extent taxpayers are already responding to the expectation of the $20-billion extra tax liability. Some will say that $20 billion is not much, but it is about the size of the defeated stimulus package.

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