January 28, 2004


Three years ago in his State of the Union, President George W. Bush outlined a bold strategy for cutting taxes to return $1.3 trillion of an anticipated $5.6 trillion surplus during the next decade. 

Certainly, new government needs developed since that time.  Home security and military incursions have dramatically dug into that expected surplus.  However, President Bush also followed a "guns and butter" policy with the largest annual growth in federal government spending since the original "guns and butter" author, LBJ. 

In this State of the Union, the President said that if Congress prioritizes and holds the growth of discretionary spending to 4%, we might be able to pare the current $550 billion annual deficit in half in the next five years.  What happened to those trillions of surplus?

The recession cannot be used as an excuse.  Anyone making a decade forecast must assume that a recession will develop.  Otherwise, the forecast is useless.  (Our economy never has experienced an entire decade without a recession). 

Indeed, the President's comment that he gave back our money so we could use it better only makes sense if he was not using it for his government.  In reality, he borrowed to give us those tax breaks, and that debt has not been cancelled. 

Which gets to one of the major economic policy themes of his message.  He wants the Congress not only to add new revenue reducing tax programs in medical and overall savings accounts with higher limits than currently exist in such accounts, but he also wants to make permanent those tax cuts of three years ago. 

The reason why the tax cuts are not permanent is because they were subject to a provision that reverts back to previous law after 2010.  As previous law is substantially higher tax rates, failure to make the cuts permanent means that tax increases will occur in the future. 

One argument for making this change would not get a passing grade in my economics class.  The President rightfully lauds the tax initiatives, especially the third one, for helping to stimulate an economic recovery.  I believe this analysis is correct. 

He goes on, however, to mention that because tax cuts worked at stimulating a sluggish economy, it is necessary for such cuts to be maintained in an expanding economy.  No, Mr. President.  The second conclusion does not follow from the first.  Indeed, many economists would maintain that because tax cuts provided thrust toward expansion, they should disappear when strong growth appears. 

As we now know that government debt will not disappear, as Federal Reserve Chairman Alan Greenspan once testified as a possibility, why are we even more aggressive at reducing revenue than when tax cuts were only supposed to return a portion of the accumulating surplus.  Has not the need for home security and military intervention reduced, not raised, the argument of returning tax collections to the people?

When President Bush was inaugurated, the federal government owed about 70 percent of a year's worth of production to its creditors.  Using the President's own estimate of cutting the current deficit in half by the end of the next five years, we will owe 1000 percent of a year's worth of production at the end of this President's second term. 

In short, what has changed in the intervening three years to suggest that even more tax revenue should be returned to the people?  Those imagined surpluses never materialized.  The needs of government have expanded.  The commitments of government continue to expand. 

Yes, deficit financed tax cuts have pushed the economy into an economic expansion.  That is what should happen when an economy is under-performing and borrowing is the cheapest way for the government to acquire resources. 

Indeed, in the past year, corporate spending hardly expanded (capital expenditures intensified but inventories continued to be liquidated).  At the same time, strong productivity gains pushed operating profits up by 18 percent and generated an 8 percent gain in corporate cash flow. 

The corporations used this cash to pay down their bank loans (which plunged by almost 10 percent).  Without loan demand, banks used their capital to buy government bonds.  Thus, the weak use of funds by corporations led to deficit financing. 

We strongly hope this will not always be.  We hope that corporations will seek opportunities and use that bank financing.  We hope that banks will get loan demand and not use their funds to buy bonds.  And when that occurs, we hope that the supply of bonds coming from the government will be diminishing as fast as the demand for them. 


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