J,
I actually looked a bit deeper in the whole issue; and I may add a few points.
I see it from a continental European perspective. That means:
-European countries enojoyed (or suffered from) decades of "democratic regimes" sometimes interrupted by partial conservatives majorities (like U.K, or Germany) but the tide was more in democratic direction
-As opposed to a stronger influence of the state in fiscal policy the money managers at the central banks led a tight monetaristic attitude, keeping interest rates higher than economically advisable. The result was that the $, and the soft currencies declined for decades (the core Euro currencies got harder and harder), which was by any means a torture for the economies.
-The active fiscal policy, which implied high tax rates but likewise high state spending, simply led to debt financing, as economies did not grow, corporations tried to hide earnings, and tax evasion amongst individuals rose.
-In the mid 90s the tide turned a bit and the EU recommended an austerity package which should lead to "balanced budgets". The result of it is that in most EU countries the share of the state (of the Gross national product) is about 40%, therefore reducing the "leeway" private business has, but most packages lead to reduced spending.
-the private savings rate is very high and somewhat offsets the rise of the state debt as well as corporate debt.
As opposed, the U.S. is in a very different state.
-The Fed generates budget surpluses for years; the boom has been "used" by the state to pay back a good part of its debt.
-On the other hand, private spending led to negative savings rates and companies raised their debt levels, when internal financing did not generate enough means to finance the steep expansion.
What to do? Rate increases could arguably be a means to reduce a rise in monetary basis in an expansive economy, especially when the expansion is not financed by the state (in that case tax increases could be a way to reduce public deficits at the expense of economic growth).
That actually happened, with the result that the economy is slowing a bit.
Now, when the distribution of money is altered through tax cuts, one has to distinguish between cuts on corporate taxes, or consumer taxes (in the form of wage taxes or indirect taxes, or, what happens very often in a increase of transfer payments).
-cuts of corporate taxes make most arguably sense during a depression, when corporate earnings are low and the motivation to create equity at the corporate level needs to be raised. From what I read fromt he commentaries, the U.S. economy is not in depression or steep recession stage (but it could be that GWB knows more than the p.t. public).
-cuts of consumer taxes make most sense in a recessive economy accompanied by a high rate of underemployment in order to ease more employment and provide incentive on the individual side.
Common to both measures is that they should be applied when monetary measures do not help. But tax cuts in an environment other than contracting is usually accompanied with a tight rule on money.
The evidence of a recession is far from being proven and in my opinion a tax cut is way too early, therefore.
Put in other words, a tax cut (with an expansive fiscal policy) as planned by GWB is more a means to steer an economy out of a recession.
As opposed to tax cuts, a reversal of the rate hikes would be the way which made more sense.
As a result, we will likely see higher inflation rates especially if the economy operates near its capacity constraints. |
