Plainly, Alan Greenspan has lost it. His latest testimony predicted a growth acceleration in the second half of 2001, a happy forecast for which, at the moment, no evidence exists. This is a prediction tailored to a predetermined policy action. Or, rather, inaction. Dithering. Indecision. Mr. Greenspan, and not for the first time, has a very bad case of the slows.

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It's a Matter of Perspective

President Bush and his team have, at least, stated the problem correctly. The economy has slowed sharply. Prudent policy requires increases in total spending. Action to make this happen needs to come quickly. It needs to be retroactive. It should be substantial.

But the president's fiscal program will achieve none of these objectives. The immediate boost to spending from his tax cut is trivial. Working families at the median income level get about $180 a year -- $15 a month. Barely enough to pay the phone bill -- for local service. Not close to enough to pay for the increase in the gas bill.

Meanwhile the budget -- such as we know of it so far -- cuts most federal spending programs. This will only make the slowdown worse. Granted the GOP wants the smallest possible government, but so what? We should delay any cuts to next year, or the year after, if we must have them at all. This year, the economy needs increases in public spending, not cuts.

The president has also made damaging political mistakes. He pushed his tax cut through the House like a freight train. As a result, opposition is hardening in the Senate. Nothing more will happen until at least May. By then, recession forecasts could start eating into the projected surpluses from which the tax cuts will be paid. And then -- will there be any bill at all? Bush might have sought common ground and quick action on a short-term bill, instead of the hard-line strategy he has chosen. As things stand, he may either get his tax bill whole, or nothing. Unfortunately for him, neither outcome would keep the economy out of a slump.

Many in Congress oppose the tax cut for the wrong reasons. Some say it's too big. This may be true over a decade and longer, but this year the economy needs a bigger boost than the bill provides. The issue is not size, but timing. Tax cuts should be phased out, not phased in; they should be bigger now and smaller later, not the other way around. Others urge a trigger mechanism, so that tax cuts would not take effect at all unless the surpluses seem sure to continue. But if the surpluses disappear in a slumping economy, tax cuts should be larger, not smaller. A trigger mechanism is a bad gimmick.

Then there are those who oppose the cut because too much would go to the rich -- which is true enough. Fairness has a place in the argument, but the economic problem is not fairness per se. It is that the top 1% already spend whatever they want to. To build up spending in the economy, you need to target the cut down the income scale, on people who would like to spend more, or borrow more, than they do. Cutting payroll taxes or providing a cash dividend would achieve this, so far as it goes, in a way that cutting income tax rates, let alone the estate tax, simply cannot.

But that brings us to another problem. Why is cutting federal taxes this year the top agenda item? Is it really what we need most, given the unfolding slump? Never mind, for a moment, how the tax cut is designed. Are households really likely to spend more, let alone borrow more, immediately -- if only they get a few extra hundreds of dollars this year? With consumer confidence in the dumps, this could be doubtful. People could just take the money and stash it away -- a rainy day reserve just as the rains start to fall.

State and local governments are another matter. Right now, states and localities are beginning to show big budget shortfalls, as the slowdown takes hold. They will shortly be cutting away at their capital budgets, their schools, and their social service programs. Or they will be raising rates on sales, property and local income taxes. These spending cuts and tax increases can be avoided. In fact, they wouldn't happen if state and local budgets improved.

So why can't Democrats and Republicans agree to immediate relief -- in the form of a new general revenue-sharing program?

The federal government has revenue. The states and cities are short. Why not bring them together? Let the states and cities decide -- on good conservative, federalist principles -- whether their priorities lie in spending or in tax relief.

The statehouses have never been centers of out-of-control spending -- and these days the GOP controls most of them anyway. But if the states choose tax cuts, as many will, the effect will still be better than cuts in the federal income tax, from every economic and fairness point of view. Finally, a revenue-sharing program can be phased down in the future when the economy stabilizes and state and local budgets improve. Or, it could be phased up, if need be, to get us out of a deeper slump.

So let me make a modest suggestion. Let's scrap the tax bill. Get revenue sharing in place right now. Save the states, the cities, and the economy -- now.

Bush and Congress can return to battle over taxes next year.

Now it's your turn. Do our policymakers --- President, Congress and Greenspan -- get it? Will they do what it takes to stop a recession? What do you think?

Do you think they get it?

Yes No

See Results

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James K. Galbraith is author of Created Unequal: The Crisis in American Pay (Free Press, 1998) and director of the University of Texas Inequality Project. A professor at the University of Texas at Austin and senior scholar at the Levy Economics Institute, he worked for many years on the staff of the House Banking Committee, where he conducted oversight of the Federal Reserve. He welcomes your feedback and invites you to send it to James K. Galbraith .

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