Magazine article The American Prospect

The Taxonomist

Magazine article The American Prospect

The Taxonomist

Article excerpt


As soon as the U.S. Supreme Court chose George W. Bush as our next president, the stock market fell precipitously. Wall Street analysts who had been loudly insisting on the need for a Bush victory suddenly began to find all kinds of new reasons for the market's problems--poor corporate profits, weak consumer spending, energy price jumps, and high interest rates, among others. All plausible. But few analysts were willing to admit the obvious: Bush's plans to reverse the tight fiscal policies of the Clinton years with big upper-income tax cuts and hugely expensive privatization of Social Security have made Alan Greenspan and the Federal Reserve more reluctant to cut interest rates.

To be sure, 2000 was a rotten year for stocks all around. But the Fed's refusal to lower interest rates in December precipitated a major additional market sell-off. In just the first week after Bush was certified by the Supremes, the NASDAQ index fell by 19 percent, the Dow by 5 percent, and the S&P 500 by 7 percent. While we will almost certainly see some Fed action to cut rates starting early in 2001, the reductions will probably be less than what the economy and the stock market need because of Bush's profligate economic program.

We've seen this play out before. In 1981, after Ronald Reagan's deficit-expansion plan was enacted, the Fed jacked up interest rates and unemployment hit its highest level since the 1930s. Only after Bob Dole persuaded Reagan to roll back a big chunk of the tax cuts in 1982 did the Fed relent and let the economy recover. Conversely, Bill Clinton's deficit-reducing tax increases of 1993 set the stage for a series of interest-rate cuts that helped produce the longest economic and stock market boom in history.

What we could have learned from these experiences is that coupling prudent fiscal policies with relatively loose monetary policy is a pretty good prescription for a healthy economy. But cheered on by his partisans on Wall Street who seem blinded to their own self-interest, Bush is hell-bent on taking the opposite course.


What is it about styling government subsidies as tax breaks that so often causes lawmakers, especially Republican ones, to lose all perspective? We saw a classic example back in 1995, when House Speaker Newt Gingrich suggested that the federal government give every poor family in America a 100 percent tax credit to buy a laptop computer. …

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