To Light The Recovery Fuse, Remember What Worked
March 4, 2002
Some economic theorists contend that to shorten a recession, government must spend more money. Another school advises that stimulation comes from government surpluses that create savings and reduce interest rates.
But the problem with the first is that for the government to spend, it must withdraw money from the private sector by taxing or borrowing. The fallacy with the second is that conceivable surpluses are too small to have a noticeable effect on the world-wide market where interest rates are determined.
So what is to be done to stimulate growth? Many economists advise remembering what worked in the past.
- To cure the stagflation of the 1970s, policymakers devised an answer which included tight money to control inflation, coupled with incentive-directed tax cuts to end stagnation.
- When President Reagan's cuts in high marginal tax rates were finally phased in 1983, they sparked the 1980s recovery boom -- with faster growth than the 1990s expansion.
- Reagan's cuts in marginal rates were successful at that time and similar to those of President George W. Bush in the current round -- but with one big difference.
- Reagan phased his in over far fewer years than the time-table reaching to 2010 that awaits the Bush cuts.
Political observers remonstrate over the Republicans' reluctance to fight for an acceleration of the marginal-rate reductions in the Bush tax cuts. They probably fear being hit over the head with the Democrats' "tax cuts for the rich" mantra.
But if putting the cuts on a faster track once again spurs economic activity as it did in the 1980s, critics complain that further delays make no sense.
Source: Robert L. Bartley, "Marginal Rates: Unlearning the Lesson," Wall Street Journal, March 4, 2002.
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