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January 26, 2001

The Fed Weighs in on the Issue of Tax Cuts

If it's a debate, and it's taking place in Washington, then the truth must be taking a beating. That's been the pattern in recent years, and in the opening rounds of the fight over tax cuts, things are holding true to form. The only difference this time is that the battle lines are being formed at a time when the U.S. economic recovery is starting to show signs of age. 

The age-old ethical question of whether dubious means justify noble ends was settled long ago in our nation's capital, judging from the statements and actions of our political leaders. The idea that a politician would be less than candid when describing why he or she supports a policy hardly comes as a shock to anyone. Appeals to emotion and raw political clout trump logic and reason almost every time. 

But some in Washington have more credibility than others, and in the wake of the longest economic expansion on record, the words of the Federal Reserve Chairman Alan Greenspan perhaps carry the most weight of all. That's why it was particularly disappointing to see the sands shift under Mr. Greenspan's feet as he groped for a way to reverse his previous pronouncements and join the tax cut bandwagon. 

The disappointment is not in the end result, but in the tortured, convoluted road the Fed Chairman used to get there. For even if his support helps boost a policy that many of us feel is a good one for the U.S. economy, it is troubling nonetheless to see our nation's chief economic policymaker join the ranks of others who are less than genuine in describing their motives. 

If that sounds a bit harsh, consider the essence of Mr. Greenspan's argument for cutting taxes. With upwardly revised Congressional Budget Office estimates of future surpluses, the Fed chairman says, we now run the risk of paying down the national debt too quickly, giving future policymakers fewer options to control the economy. 

That's the kind of logic we might expect of a second year graduate student, not the leader of the world's largest economy. CBO projections, which extend ten years into the future, are not only unreliable, they are logically flawed, as they assume Congress will stick to budget agreements that have been broken every year. Moreover, the free-wheeling spending of Congress in the last two years has demonstrated convincingly that commitments to retire debt are worth very little. 

It is increasingly clear that the debate over tax cuts is really a fight over the size of the Federal Government. There is a hollow ring to the new administration's claims that a tax cut is needed to boost the slumping economy, to be sure. But its logic is no more flimsy than the new-found fiscal austerity of some Democratic leaders, or the appeals to save Social Security or other popular programs. Neither view openly acknowledges the simple truth that the only way to get Congress to spend less money is to take it away. 

Link to this commentary: https://commentaries.cberdata.org/490/the-fed-weighs-in-on-the-issue-of-tax-cuts

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About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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