One of my New Year's resolutions was to give Senate Democratic Leader Tom Daschle a second chance after he scuttled the so-called economic stimulus package. But a week into the New Year I find myself having to break that resolution after hearing the Democratic leader rail against President George W. Bush. While Bush is fighting a war against terrorism around the world, Daschle is waging war against the president on the home front.
Flanked on stage by former Treasury Secretary Robert Rubin, Daschle made the following bizarre claim: "Not only did the Bush tax cut (which did not even began it's slow five-year phase-in until July) fail to prevent the recession (which started four months earlier in March), but it probably made the recession worse" (which would be the first time in recorded history a tax cut ever caused or exacerbated a recession).
The idea that Bush is responsible for the recession and his tax cut is making it worse is ludicrous and ordinarily would be laugh-out-loud hilarious were it not that Daschle is making these obviously outlandish claims in order to deceive the American people and undermine the Bush presidency. If Daschle really had the courage of his convictions, he would call for the complete repeal of the Bush tax cuts on the grounds that the American people are undertaxed. Now that would give the American public a real choice at the polls come November.
Instead, Daschle simply carps at the president and proposes a "growth agenda" of his own. The only problem is, it's government the Daschle agenda seeks to grow, not the economy. Daschle's concept of a growth agenda consists of special-interest temporary tax credits and rebates for one year followed by permanently higher taxes and a permanent expansion in federal entitlements, all smuggled in under the guise of temporary spending increases required for recession relief and homeland security.
Some words and phrases are simply too obscene to utter in polite society. "Tax increase" is one of them. Therefore, Daschle speaks in code. Senate Republican Leader Trent Lott provided the key to deciphering Daschlespeak when he observed that whenever Daschle says "fiscal discipline," he really means "high taxes" or "tax increase."
With this in mind, here, decoded, is the Daschle/Rubin economic theory in a nutshell as articulated in the Democratic leader's speech last week: "'Tax increases' lowered our long-term interest rates and increased business confidence, which helped spark new investment, which produced strong economic growth, which lowered the deficits even more, which reduced long-term interest rates even further, which created more jobs and stronger economic growth."
Wow! I'm reminded of the old saw that "It's not what we don't know that hurts us so much as all those things we think we know that just aren't true."
Economic research and empirical evidence totally disprove this line of reasoning, but you don't need to be an economist to appreciate how profoundly wrong it is. History belies it.
First, consider Daschle's claim that President Bill Clinton's tax increases were directly responsible for shrinking the deficit and producing "eight years of broad-based economic growth." The fact is, when Clinton took office, the economy was growing at more than 4 percent a year. Then Clinton convinced Congress to raise taxes, and for the next four years we experienced the slowest economic recovery from a recession since the Great Depression. In 1995 the deficit was still more than 2 percent of GDP.
It wasn't Clinton's tax increases that sent business confidence soaring and set off the economic boom midway through his presidency; it was Republicans' taking control of the Congress in 1996 for the first time in 40 years and then cutting the capital gains tax, lowering tariffs, reforming welfare and finally getting federal spending growth under control.
Second, Daschle's contrived syllogism turns on a false premise, namely that large deficits correlate with high interest rates and large surpluses correlate with low interest rates. At the end of FY 1993, when Clinton raised taxes, we had a budget deficit equal to 3.9 percent of GDP, and the interest rate on 10-year Treasury notes stood at 5.3 percent. After the 1997 tax cuts, the economy boomed and as a result, by 2000 we were running a surplus equal to 2.4 percent of GDP, yet interest rates on 10-year Treasury notes were higher (6 percent on average throughout the year), not lower.
According to Daschle's crank theory (a theory only Paul Krugman could believe), interest rates should have fallen, but instead they went up.
The fact of the matter is, interest rates are set in global capital markets and are determined by inflation, inflation expectations for the future and the after-tax rate of return on capital.
The one thing Daschle did get correct is when he called on Bush "to submit to Congress not simply a one-year budget proposal, but a long-term plan to restore economic growth." In doing so, Daschle implicitly acknowledged that his own passel of one-year tax-and-spend gimmicks is insufficient to restore prosperity.
Bush now must answer this challenge by proposing a serious economic program of permanent tax reform and regulatory reform measures to remove the policy impediments that stand in the way of growth. It simply won't suffice to repackage the administration's stimulus package of temporary tax credits and rebates from last year and rename it a program for "economic security." How to generate more economic growth is the problem, and Daschle has demonstrated he doesn't have the solution. That's up to President Bush.