POLITICS OCTOBER 29, 2001
Do economic conservatives really believe in the unadulterated free market, or do they believe in the interests of the rich? Usually it's hard to tell. Since the two imperatives often go hand in hand—unregulated capitalism naturally produces great inequality—the distinction between supporting laissez-faire and supporting the wealthy is usually invisible. But from time to time an issue comes along that pits one against the other, creating a kind of natural experiment to distinguish supporters of laissez-faire purity from supporters of the affluent. One such experiment occurred last month with the airline bailout, when conservatives in Congress decided that airline workers threatened by market forces—that is, laid off—did not require help, but airline companies threatened by market forces did. When forced to choose between their cherished economic doctrines and the interests of the affluent, conservatives—or at least the ones who hold power in Washington—chose the latter.
Something similar is happening as Congress crafts legislation to alleviate the feared recession. At first, in the immediate aftermath of September 11, President Bush seemed to hew to a bipartisan path, agreeing that any anti-recessionary measure should consist of temporary tax cuts and spending for the economically afflicted. But conservatives in Congress immediately complained that Bush was caving in to big-spending Democrats, whose left-wing populism stood in the way of sound economics. "I understand that if we've got fifty billion dollars, that we're going to have to spend at least half of it on things that have nothing to do with stimulating the economy as a `tribute,'" groused GOP Senator Phil Gramm. "But to save my life, when I listened to [Democratic] Chairman [Max] Baucus's list, it's all tribute and no stimulus." House Majority Leader Dick Armey charged that "the Democrats will write an income-redistribution bill" and added, "I don't think they can find a reputable scholar in America who will say that's as effective as cutting taxes and inspiring investment." In this telling, liberals are primarily concerned with the overall distribution of wealth, and conservatives are simply following basic economic logic. It just happens—sigh—that this logic requires them to give big tax cuts to the rich.
The truth is exactly the opposite. Washington conservatives are actually driven by an overwhelming interest in wealth distribution—even when that interest leads to gross economic mismanagement. And, in the case of the stimulus bill, their solicitousness for the rich has led them to oppose the utterly uncontroversial fiscal steps most likely to forestall a recession.
Economists don't agree on what causes recessions, but they do agree on what happens as a result: People grow pessimistic about the economy, which causes them to stop spending money, which makes the economy even worse—and on and on, in a vicious cycle. Economists also agree that the fiscal solution—should there be one at all, which is far from unanimous—is simple: Get people to spend more money.
THERE ARE TWO WAYS Congress can do this: raise spending or cut taxes. In the current debate, congressional Republicans maintain that any stimulus package should consist entirely of tax cuts, with no new spending. Does this have anything to do with economics? Not really. True, spending on infrastructure doesn't help fight most recessions. To construct, say, a new building, the government has to solicit bids, have plans drawn up, and by the time the cement gets poured, the slowdown will probably have ended. (This hasn't stopped some liberals from seizing on the recession to propose gigantic new construction programs, although fortunately such notions remain consigned to the fringe of the Democratic Party.) But other types of government spending enter the economic bloodstream much faster and can therefore help stave off a recession. To hand out new benefits to laid-off workers, for instance, all the government has to do is cut some checks, which it can manage pretty quickly. (This is what Congress declined to do for the laid-off airline employees.) But conservative dogma forbids even such usefully stimulative spending.
It is also true, of course, that tax cuts can make people spend money. But only certain kinds of tax cuts. The rebate checks included in the big tax cut passed earlier this year, for example, seem to have done little for the economy. (According to a University of Michigan consumer survey, people spent less than $1 in $5 of their rebates.) The one thing virtually all economists agree on is that the key to spurring spending is giving money to workers with low incomes because they spend the highest proportion of their incomes. Common sense, and a stack of economic studies, tells us that those who live hand-to-mouth save the least of any group. And so Democrats, and some Republicans, have proposed sending a second round of rebate checks to workers with incomes too low to have qualified for the first round.
Alas, this also runs afoul of conservative doctrine. Gramm recently sneered that this would constitute "giving tax cuts to people who do not pay taxes." (In fact, low-income workers pay excise taxes, payroll taxes, and sales taxes, among others.) Republican leaders may accede to a low-income rebate, but only as the price for getting the tax cuts they really want. The primary income tax cut sought by the Bush administration would cut the 28 percent tax rate to 25 percent. This would benefit only the best-off 25 percent of workers, virtually ensuring that little of it is spent.
In addition to preferring tax cuts over spending, and tax cuts targeted to the well-off over tax cuts targeted to the needy, the congressional Republicans have expressed a third preference that flies in the face of economic logic: permanent tax cuts over temporary ones. Here the problem is not only that permanent cuts continue to drain government revenue long after the threat of recession has receded, but also that permanent cuts—at least when it comes to business—are less effective at stimulating the economy than temporary ones.
Both parties, for instance, support some kind of tax credit to encourage business investment. After all, during a typical recession, not only do consumers stop buying goods, but businesses also stop buying equipment. The solution proposed by Republicans is permanent tax breaks for business investment. But these would have a limited impact. The reason businesses aren't buying equipment now is because the economy is lousy. If you offer them a permanent incentive to invest, their calculation changes very little: If they can still get their tax credit after the economy turns around, they might as well wait it out. By contrast, if Washington offered a tax break for new investment over the next year only, it would give businesses a significant incentive to invest now, when their actions might help prevent a recession. This is pretty uncontroversial among economists. Even Glenn Hubbard, the chairman of Bush's Council of Economic Advisors, wrote as much in a paper he co-authored five years ago: "Temporary investment incentives can have even larger short-run impacts on investment than permanent investment incentives."
To be fair, there is a perfectly respectable conservative argument that fiscal policy is too slow and clumsy to fine-tune the business cycle, so Congress should stay out of it altogether. Indeed Hubbard's paper takes just this position. If that's what Republicans believe, though, then they have no particular reason to pass their tax cuts now, as opposed to a year or two down the road. (Indeed, given the emergency expenditures needed in the wake of the attacks, they should defer nonstimulative tax cuts in the short term.) But Bush and the GOP haven't made that case. The explicit rationale for their wish list of tax breaks is their potential to remedy a recession. Bush has made the classic business-cycle management argument. "The best way to stimulate demand," he stated earlier this month, "is give people some money so they can spend it." Unfortunately for Bush, that doesn't happen to be the best way to transfer income to the rich. Which is what economic conservatism is actually all about.
This article originally ran in the October 29, 2001 issue of the magazine.