The Economic Front in the USBush Fiscal Policy
under attack. Exclusive Interview with Nobel Kenneth Arrow, from Stanford University
(1972 Economy Nobel laureate), and comments from analyst Peter Cohan in Boston. Ten
Nobel Laureates and 450 US economists say the Bush Tax Cuts Program is the Wrong
Approach. A full-page advertisement in the New York Times this week shows a statement
signed by Nobel laureates George Akerlof and Kenneth Arrow in the two first lines,
followed by other 8 Nobel laureates -Lawrence Klein, Daniel McFadden, Franco Modigliani,
Paul Samuelson, Robert Solow, Joseph Stiglitz, Lawrence Klein and William Sharpe.
The statement was also signed by Dean Laura D'Andrea Tyson of Haas School of Business
of University of California at Berkeley and top economic advisor of Clinton Administration.
The Economic Policy Institute posted the statement in its website at www.epinet.org/stmt/index.html.
| THE
MAIN IDEAS OF THE STATEMENT |
|---|
| The tax
cut plan is a permanent change in the tax structure and not the creation of jobs
and growth in the near-term. The permanent dividend tax cut, in particular, is
not credible as a short-term stimulus.As tax reform, the dividend tax
cut is misdirected in that it targets individuals rather than corporations, is
overly complex, and could be, but is not, part of a revenue-neutral tax reform
effort.Passing these tax cuts will worsen the long-term budget outlook,
adding to the nation's projected chronic deficits. This fiscal deterioration will
reduce the capacity of the government to finance Social Security and Medicare
benefits as well as investments in schools, health, infrastructure, and basic
research.Moreover, the proposed tax cuts will generate further inequalities
in after-tax income. To be effective, a stimulus plan should rely on immediate
but temporary spending and tax measures to expand demand, and it should also rely
on immediate but temporary incentives for investment. Such a stimulus plan would
spur growth and jobs in the short term without exacerbating the long-term budget
outlook. |
INTERVIEW WITH KENNETH
ARROW
«The long-term tax cuts are in no sense adapted for the
purpose of meeting the short-term economic fluctuation.»
Kenneth
Arrow interviewed by Jorge Nascimento Rodrigues,
February 2003 © Gurusonline.tv, 2003
Record budget deficits
is a "keynesian" solution for the present recession/depression period
in the US? My opinion is the following: (a) Permanent tax cuts are
not a remedy for a time-limited recession. (b) Tax cuts, temporary or permanently,
affect consumption with a lag among those that are not cash-constrained. (c) On
the other hand, such steps as grants-in-aid to states and localities (which are
subject to budget constraints), temporary investment tax credits, and increases
in the length and rate of unemployment insurance will have an immediate effect
on spending. A 10 year plan of 674 b US$ in tax cuts is not excessive? It's
a matter of degree. I note in this morning's news that Alan Greenspan is also
alarmed about the increased deficits. The planned tax cut means that at the end
of ten years the ratio of public debt to GDP is about five percentage points higher
than it would otherwise be. That is not catastrophic, but it is not good either,
especially in view of the need to accumulate savings to meet increased retirement
(social security) and Medicare costs. A system of tax cuts is a short
term stimulus for the stock markets? I don't consider an increase in
stock market prices an appropriate goal of government economic policy in itself.
It might or might not have an effect in increasing investment. The deficits, current
and foreseen, will increase the long-term interest rate, which will work against
both investment and stock market prices. Some analysts say that military
spending is better than consumer demand and investment, so the war or some wars
in this decade will be good for the recovery. What you think? All the
studies I know suggest that military spending has about the same effect as any
other spending. The Iraq war can be a significant stimulus, however, only if it
is much more costly than the Administration is now claiming. Why you
signed the statement? I signed the statement because it seems perfectly
obvious to me that the long-term tax cuts are in no sense adapted for the purpose
of meeting the short-term economic fluctuation.
PETER
COHAN COMMENT ON THE NOBEL LAUREATES STATEMENT
«The permanent
tax cuts are primarily a political payoff to encourage reelection of the current
government in 2004.»
How bad is the US economy situation?
The American economy is being held hostage by war fears. Due to low interest
rates, consumer borrowing has increased. The cash from the borrowing has permitted
consumers to keep the economy from collapsing. Since an estimated two-thirds of
the American economy is accounted for by consumer spending, this strategy has
kept things from being worse than they would have otherwise been. The big problem
is the collapse in business investment. With an overhang of excess productive
capacity and high debt levels, the need to expand capacity is not evident. Until
capacity utilization increases - either by reducing capacity or increasing demand
- there will not be a need for increased business investment. And all such considerations
will be subsumed by war fears which could last much of 2003.
Record
budget deficits is a "keynesian" solution for the recession/depression
period? A 10 year plan of 674 b US$ tax cuts is not excessive?
The
deficit approach is very dangerous because it increases the level of borrowing
during a period of economic weakness. When interest payments pile up without the
cash to cover them, bankruptcy is generally the result. Granted $674B over 10
years does not sound like a lot in the context of a $10 trillion economy, however,
this tax cut is taking place at the same time that the government will need to
spend huge amounts for its basic operating budget and does not include the cost
of war - which has been estimated at between $100 billion and $200 billion.
A system of permanent tax cuts is a short term stimulus for the stock markets?
A system of permanent tax cuts will not stimulate the stock market. It will
probably take 20 years before the average American is willing to invest in the
stock market again. The abuses of trust that were highlighted in the last few
years and the $8 trillion in lost wealth will make it necessary for a new generation
-- untainted by this experience - to revive interest in equity investing. The
permanent tax cuts are primarily a political payoff to encourage reelection of
the current government in 2004.
Some analysts say that military spending
is better than consumer demand and investment, so the war or some wars in this
decade will be good for the recovery. What you think?
Military spending
is unlikely to create an economic recovery unless the war lasts for a long time
-- say five to 10 years and involves spending, perhaps, $200 billion a year to
build new arms. I shudder to contemplate the conditions under which it would be
necessary to wage such a war.
Peter S. Cohan &
Associates
E-mail: peter@petercohan.com
Http://petercohan.com |
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