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Why the Tax Cuts are to be repealed......

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posted on Jan, 8 2004 @ 12:18 PM
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In some form, by the next Democratic President.
It is a lighting bolt issue, but it should not be one that influences the American 2004 presidential vote.
IN 1975, POLITICAL scientist Edward Tufte and economist William Nordhaus put forth a theory of the political business cycle. Usually, "business cycle" refers to the normal ups and downs of the economy. Their insight was that the business cycle is influenced by politics.
These scholars documented that incumbent presidents often used their influence with Congress and the Federal Reserve to artificially pump up the economy for their reelections and dealt with the resulting damage once they were safely returned to office. Richard Nixon's 1972 landslide nicely fit the pattern. So did Lyndon Johnson's "guns and butter" economic program of 1967-68 (except that the Democrats were undone by the Vietnam War).
The theory later fell into disfavor. Neither Jimmy Carter (defeated in 1980) nor George H.W. Bush (defeated in 1992) could manipulate the economy well enough to save their jobs. Carter fell to stagflation and Bush I to recession and a jobless recovery.
But the political business cycle is back with a vengeance, and this time the morning after will be a corker. The only question is whether the damage will be visible before or after Election Day.
President Bush has unleashed the most massive fiscal stimulus program since World War II, with immense deficits that only grow after 2004 as the biggest tax cuts for the wealthiest kick in. He has timed the relatively meager breaks for the middle class for this (election) year.
Meanwhile, Fed chairman Alan Greenspan (up for reappointment in June) is doing his part to fuel the election-year boom. Despite his own misgivings about immense deficits -- he was far from shy about this during the 1990s -- Greenspan has loyally kept mostly silent when it comes to Bush's deficits. More important, Greenspan is pumping up the recovery with low interest rates notwithstanding his earlier concerns about the danger of economic bubbles.
Thanks to this short-term hyperstimulation, Bush might well have his election year recovery. For now, corporate profits are up, the stock market is booming, and there is even a trickle of job growth.
But there is not a reputable economist -- left, right, or center -- who thinks this act can continue beyond a year or two. Bush's own treasury secretary, John Snow, and his chief economist, Greg Mankiw, both warned about this danger in their previous lives.
As the deficits spin out of control, interest rates will rise. If Bush is reelected, the deficits would also be used as justification for a round of cuts in social outlays that would make Bush's program cuts to date look like mere tinkering.
Meanwhile, serious social challenges like the retirement of the baby boomers and the spiraling of health care costs would be shifted from society back to the individual through proposed privatization of Social Security and health plans that made the subscriber pay ever more of the costs out of pocket (or go without). The larger fiscal and economic mess would be left for Bush's successor after Bush was safely in his presidential library.
Not only has Bush taken short-term political manipulation of the economy, in Tufte's sense, to new and cynical extremes; he has invented a wholly new kind of political business cycle in the form of programs and policies that look impressive only in the short run and turn out to be disasters later on.
Exhibit A is the recently enacted Medicare drug benefit program. Consumers won't experience the fraud firsthand this year since the program doesn't become available until 2006. Nice touch, that. As the law is written, less than half of actual drug costs for most participants will be covered. And seniors will get only one chance to decide whether to opt for the (inadequate) Medicare program or to stay with (increasingly unregulated) private drug insurance coverage that could deteriorate over time.
www.boston.com...


Another set of Economists are ringing the alarm bell over this move to hyperstimulate the economy for a political cycle:

The report warns that the United States' net financial obligations to the rest of the world could be equal to 40 percent of its total economy within a few years "an unprecedented level of external debt for a large industrial country," according to the fund, that could play havoc with the value of the dollar and international exchange rates.
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The I.M.F. has often been accused of being an adjunct of the United States, its largest shareholder. But in the report, fund economists warned that the long-term fiscal outlook was far grimmer, predicting that underfunding for Social Security and Medicare will lead to shortages as high as $47 trillion over the next 70 years or nearly 500 percent of the current gross domestic product in the coming decades.
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Moreover, the fund economists said that the administration's tax cuts could eventually lower United States productivity and the budget deficits could raise interest rates by as much as one percentage point in the industrialized world.
nytimes.com...

So think of tax cuts as they stand now, in the context of the proverbial " fighting with one hand tied behind your back" - there are, as documented above, more than enough issues where the operating federal budget is going to need help in just maintaining a steady state. The "Kill the Beast" mentality on social programs is a wisdom-less course of action. Adult, non-ideological driven audit and restructure is infinitely more sound; and it won't destablize the country.




 
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