Is A Tax Cut The Right Remedy?

George W. Bush sees a downturn ahead. And he has one idea in particular about what to do

Even before he was declared President-elect, George W. Bush had become bear in chief. For weeks he's been warning that the U.S. economy is in for hard times. He may steer clear himself of the term recession. "Possible slowdown" is one way he puts it. But dirty work is what Vice Presidents are for. So Dick Cheney has been sent out to say the forbidden word. As early as Dec. 3, he was on Meet the Press warning that the nation "may well be on the front edge of a recession."

Why would Bush be willing to spook the economy he's about to inherit? For starters, he needs to spread the idea that if things get tight for a while, the problem started before he took office. The last recession occurred during his father's presidency. He doesn't want the next one called Bush 2. But he also hopes to use the prospect of trouble ahead as a rationale for his proposal to cut taxes by $1.6 trillion over the next 10 years. As he said last month, "A tax-relief plan for everybody serves as an insurance policy against a potential economic downturn."

It was to underline his worries about a downturn that Bush scheduled his economic forum in Austin, Texas, this week, a round table with selected economists to get their take on things. Though they aren't likely to say so at the forum, one worry many economists have is that Bush's warnings will become a self-fulfilling prophecy, trash talking a wobbly economy right off the rails.

Then again, he and Cheney are just enlarging on what everybody is already thinking--that even if we can avoid a real recession, meaning two consecutive quarters in which the economy shrinks, a slowdown in the rapid growth of the '90s is plainly in store. The dwindling NASDAQ says it all. If those sputtering dotcoms are the economic engines of the future, then the future's just not what it used to be.

Bush's bearishness may also reflect the influence of his chief economic adviser Larry Lindsey. The former Federal Reserve governor has been sour for so long on the economy's prospects that he cashed out all his stocks in 1997, when the Dow Jones average was still at 8,500. And for Lindsey, a dedicated supply sider, the remedy for recession just happens to be a tax cut. Most economists insist, however, that tax cuts have very little effect on recessions, largely because their benefits kick in too late to affect the problem. To pre-empt his critics, Bush could redesign his proposal to provide accelerated benefits. One possibility being discussed among his advisers would be to change the formula by which payroll taxes are withheld, as his father did in 1992. That would put extra cash in taxpayer pockets quickly.

Another reason the Bush tax cut may not have much impact is that its biggest parts, like across-the-board rate reductions, are the ones least likely to sail through a sharply divided Congress. And the pieces that are easiest to pass, like an end to the marriage penalty for joint filers, are too small to do much to stimulate consumer spending. Democrats have accepted the inevitability of some kind of tax reduction's passing Congress this year. House minority leader Dick Gephardt has already said so. But none of them is prepared to support cuts of the size that Bush is looking for. Meanwhile, they are casting around among smaller-scale ideas.

Democrats are also planning to stick to the argument that a big tax cut means you can forget about using the burgeoning federal budget surplus to pay down the national debt. In an adroit bit of political gamesmanship, Bill Clinton played up the goal of debt elimination last week when he unveiled new White House budget calculations that show the total surplus over the next 10 years rising to nearly $5 trillion, an $800 billion increase over the last estimate issued just six months ago. "We should be shooting for a debt-free America by the end of the decade," he said. But Bush and his team say the skyrocketing surplus is evidence that a tax cut is not only necessary but affordable.

In the view of many economists, interest-rate modifications are better than tax cuts as a way of combating slowdowns, in which case the main weapon of recession fighting would rest with Greenspan. All the same, Bush is hoping that he can get the Fed chairman to signal in some way that he too would agree to a big slice, perhaps during his upcoming testimony before Congress. Greenspan thinks the surplus should be used to pay down the national debt, but he would accept seeing some of it go back as a tax cut before he would allow Congress to use it for more spending programs.

Bush's adviser Lindsey is a good friend of the Fed chairman's. So are Cheney and Paul O'Neill, Bush's choice as Treasury Secretary. Both worked with Greenspan in Gerald Ford's White House. All of them will be going to work on Greenspan to persuade him that Congress would simply spend the surplus before it can be used for bill paying. And George W., whose father had notoriously frosty relations with Greenspan, has gone out of his way to court the chairman. A few weeks ago, after their get-acquainted meeting in Washington, he even squeezed the uncomfortable-looking Greenspan on camera. But when you start talking like the bears, as Bush has been doing, maybe bear hugs are just what come naturally.

--Reported by Sally B. Donnelly/Washington