President Bush's proposed budget blurs the important distinctions between stimulus and growth. Given the differing objectives of the two -- on the one hand increasing spending to stimulate the economy in the short term and on the other increasing saving to boost longer-term growth -- it is nearly impossible to accomplish both.
With the stimulus and growth components of the president's economic proposals canceling each other out, the budget plan is likely to accomplish neither.
When stimulus is the objective, deficit spending makes sense as a way to funnel more money through the economy to speed up recovery. An effective stimulus policy should be both targeted, to ensure that the funds are spent rather than saved, and temporary, to avoid an ongoing drain on the budget.
The purpose of a long-term growth package is the opposite. Changes in the tax code can minimize distortions that slow economic growth. One way is to encourage rather than punish saving and investment, which are the ultimate engines of growth.
So how does the Bush budget plan stack up?
Not well. His $360-billion plan to eliminate dividend taxes and vastly increase the individual saving that can be accumulated tax-free is structured primarily as a growth package -- yet deficit-financed as though it were a stimulus. The result: Poorly targeted tax cuts would provide little promise of spurring short-term spending, while the fiscal drag from deficit financing would drain away any savings gains.
Though administration officials have been careful not to describe it as a stimulus package, the need to get the economy back on track is clearly a primary rationale for introducing a bold economic policy in the budget. How else could another round of tax cuts be justified, given burgeoning U.S. budget gaps and increasing costs of national security?
Even the most ardent supply-siders don't pretend tax cuts can cover these costs. It is only the presumption of the need for fiscal stimulus that justifies borrowing to pay for the package in the first place.
But the stimulus argument falls flat when you look at the timing and specifics of the economic proposals. Only the slimmest fraction of the money would enter the economy in 2003, with most of it falling in 2004 and beyond, well after recovery presumably will be underway. Moreover, the elimination of individual taxes on dividends and introduction of larger tax-free saving vehicles would encourage higher levels of saving and investment -- a good thing in the longer run, but not when stimulating consumption is the goal.
