Newspaper article St Louis Post-Dispatch (MO)

The Tax-Cut Mirage

Newspaper article St Louis Post-Dispatch (MO)

The Tax-Cut Mirage

Article excerpt

Bob Dole himself said it first: "I'm willing to be another Ronald Reagan if that's what you want." Dole's $546 billion tax-cutting plan is indeed a Reagan echo. But as a political realist who lacks Reagan's gift for fantasy, Dole must know that the plan he announced is a revival of the voodoo economics of the 1980s.

As in 1981, radical tax-cutting is airily extolled as a painless route to economic growth and a balanced budget, "reaching for the stars," as Dole appropriately calls it. The theory is that tax-cutting augments saving, saving spurs investment and investment yields growth and higher revenues. In theory, you retrieve more from an economy freed of government shackles than you forfeit in revenues. Everyone's a winner.

It's an appealing vision, as delicious as a desert mirage. The hard questions concern its relevance in a mature industrial economy whose historic growth rates are lower than optimists claim they can be, and whose private sector is skilled at anticipating and discounting government manipulation. Dole's plan had a major-league tryout in the 1980s, and the result was routine economic growth at the cost of an explosion in national debt. The Treasury borrowed more money in 10 years than it had borrowed in the previous 190.

This borrowing produced a boom of sorts, as measured from the bottom of the severe 1982 recession, but at high cost. The United States entered the Reagan decade as the world's chief lender and emerged its chief borrower. That cheapened the dollar against other currencies and generated huge, chronic trade deficits by making U.S. exports expensive and imports cheap.

Meanwhile, interest rates, reflecting the competition for funds in the capital markets, soared to historic highs (in inflation-discounted terms) and lingered there for much of the decade. It was a great time for those with idle funds to lend and a hard time for families trying to finance a first house or furniture or cars. …

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