| Debt and Taxes |
7 July 2003
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Tax Cuts May Wreck Economy
It is an article of faith among Republicans that tax cuts help the economy. It is a further article of faith that deficits are destructive of prosperity. The latest statement from the Bank of International Settlements should provide some exciting arguments over martinis and rare steaks this summer -- it suggests that by cutting taxes, confidence in national finances are undermined, thereby damaging economic recovery.
To be fair, the BIS said that the Fed and the US government were right to try spurring the lethargic US economy. The worry comes from the long-term effects of unsustainable levels of public and private sector debt. In the diplomatic talk of the BIS, the US risked "worsening imbalances" that could yield a "painful correction" in the future. Translated, the current cure could be a future disease.
The macroeconomic truth is unpleasant for fiscal conservatives. In 2000, the US ran a budget surplus of $237 billion. The 2003 official estimate for the deficit is $246 billion with some fearing $400 billion is a more accurate figure. In an economy with a $7 trillion GDP, that figure is not particularly worrisome in and of itself, but the rapid decay is.
The crux of the problem, not surprisingly, is cultural not economic. Conservative thinker George Will hit the nail on the head years ago when he said that Americans want to consume more government than they want to fund. Balance can only be restored when revenues for the Federal government rise and/or federal spending declines. Americans, though, don't seem eager to elect a leader who promises higher taxes and fewer services.