Socking It to the States. (Articles)

Article excerpt

Sentient observers know that American state and local governments face a historic crisis--that they are cutting vital services and raising taxes, mainly on those already most stressed in difficult times. Schools in Oregon are closing early; New York City plans to close firehouses and reduce garbage pickups. States have already closed gaps of $50 billion in their 2003 budgets. Now they face the necessity of imposing measures almost twice as drastic for 2004.

In this crisis, fiscal assistance from the federal government to the states and cities--in two words, revenue sharing--remains our most urgent economic policy need today. To see this, just compare it with all the alternatives.

Monetary policy has run out of steam. Continued low interest rates help to ward off the evil day when consumer bankruptcies and mortgage foreclosures begin to explode, but they cannot produce a recovery on their own. That will happen only after household balance sheets improve--a process of paying down consumer and excessive mortgage debts that has barely started. And so Alan Greenspan has faded into the wallpaper; he emerges nowadays only to make timidly optimistic forecasts. There is nothing much more he can do.

Tax law under George W. Bush is a disgrace. How else to describe a proposal whose centerpiece is the elimination of income taxes on corporate dividends? How else to describe Bush's fixation on permanent repeal of the estate tax? These measures and the others like them are not a growth policy. They will have little effect on spending, for two well-known reasons: They are targeted to the wealthy, and they are back-loaded so as to conceal their true long-term impact on budget deficits.

A better policy would be to cut working people's taxes temporarily. A partial holiday in the Social Security payroll tax has been proposed, and it's not a bad idea. But are tax cuts what working Americans really want? Would they rather have them than art and music and physical education and foreign languages in their schools? Would they rather have them than open libraries and decent garbage collection? There is just no evidence that they would.

What about tax cuts for business? A business investment tax break, such as temporary accelerated depreciation, would not do much good, but it probably wouldn't do great harm. However, with so much excess capacity, don't count on a big boost from this area, whatever happens.

New federal spending, on the other hand, would effectively promote early recovery. And we will see this at work later this year, when by a miracle of astute timing the Pentagon sets about replenishing its Tomahawks and tank treads. This will boost economic growth, but it will not create many new jobs and will do almost nothing for the well-being of most Americans. …