Fiscal Manipulation: A History of Unexpected Consequences

Article excerpt

Byline: Associated Press

WASHINGTON Its not the first time that government economic engineering has produced a time bomb with a short fuse.

Back in 2011, few lawmakers, if any, thought deep and indiscriminate spending cuts, totaling about $85 billion and now starting to kick in, were a smart idea.

But history shows a long trail of unintended consequences from government actions or inaction:

* President Franklin D. Roosevelt, after a solid re-election victory in 1936, believed that the Great Depression was winding down. Unemployment was declining and economic activity was coming back.

Roosevelt and Congress believed it was time to cut free-flowing government spending and raise taxes. The Federal Reserve tightened its financial reins. But the fragile economy couldnt withstand the blows. The Depression roared back, lasting until the 1940s when U.S. involvement in World War II finally revived the economy.

* President Ronald Reagans ambitious 1986 overhaul of the tax code simplified taxes and closed many loopholes, including repealing the popular tax deduction for credit-card interest. Then people started borrowing heavily against fast-rising equity in their homes; that interest still was deductible.

But the practice eventually helped put millions of homeowners under water on their mortgages when the housing bubble burst, contributing to the 2007-2009 recession.

* The Fed has kept short-term interest rates unusually low and printed money to keep downward pressure on longer-term rates, easing borrowing for businesses and individuals.

Yet retirees and other savers are earning near-zero interest on bonds and savings accounts, and many investors are jumping into riskier transactions in search of higher returns.

Fed Chairman Ben Bernanke and many mainstream economists argue that the Feds stimulus policies have helped the housing and financial sectors recover and kept the downturn from getting worse.

One leading Fed critic Sen. Bob Corker, R-Tenn., accused Bernanke at a hearing last week of "throwing seniors under the bus" by driving down interest rates on their savings to almost nothing.

* The tax cuts of 2001 and 2003 were first proposed by Texas Gov. George W. Bush as he campaigned for president in 2000. At the time, the economy was enjoying rare multiyear budget surpluses and government economists were predicting surpluses well into the future. Bush told cheering audiences his tax cuts would return to taxpayers "what is rightfully yours."

Those cuts long have outlived the surpluses, which vanished in Bushs first year in office. …