The economic proclamations of Senate Majority Leader Tom Daschle (D-SD) are so far removed from any accredited economics text that it is amazing a grown-up could believe them.

On the one hand, he blames President Bush for aborting the surplus and worsening the recession with his tax cut. On the other, he fervently claims he is not going to work to repeal the tax cut (at least not in its entirety). So he wishes to have it both ways: He wants to blame tax cuts for deficits and the recession without actually leaving himself vulnerable to charges of raising taxes by going on record for its repeal, as Hillary Clinton has done.

Daschle has been the most effective post-Clinton Democratic leader. He is liberal, but not as outlandishly so as the Maxine Waters wing of the party. He is articulate and has a good television presence. He has repeatedly routed the hapless Trent Lott, his Senate Republican counterpart, to the point where he was able to coax Jim Jeffords (I-VT) to bolt the GOP and turn control of the Senate over to the Democrats.

But George W. Bush is not Trent Lott. As soon as Daschle began the year with his most strongly worded criticism of the tax cut yet, the president fired back. "There are some in Washington saying the tax cut caused the recession. I don’t know what economics textbook they’re reading. And I challenge their economics when they say raising taxes will help the country recover." While "not over my dead body will they raise your taxes" was not as well phrased as his father’s "read my lips," it was an appropriate shot across the bow. This President Bush has sound instincts on tax policy.

Business spending, manufacturing production and the stock market all began their decline before Bush was elected. The economic growth rate during the fourth quarter of 2000 was roughly one-third that of the first quarter. According to the National Bureau of Economic Research, the economy went into recession about two months into Bush’s presidency, before the tax cut passed in May. Most importantly, 75 percent of Bush’s tax cut has not yet taken place. The bulk of the tax cut implemented at this point is not that which will lower marginal rates and increase after-tax earnings potential, but demand-side rebates touted by Democrats like Daschle himself.

So by what possible logic can Daschle claim that the Bush tax cut counterintuitively hurt the economy? Ever since the Clinton years, the Democratic Party line has been that the path to prosperity is through the federal government maximizing tax revenues in order to keep the federal budget in balance - and from there in a position of increasingly large surpluses - so that long-term interest rates will fall and stimulate economic growth.

Paul Krugman might believe it, but this is economic hogwash. Interest rates have actually fallen as the government has gone from a large surplus to practically no surplus, with projections of a deficit for the next fiscal year. Japan has the world’s lowest interest rates but one of the largest budget deficits. Not only is the relationship between deficits and interest rates tenuous, the relationship between tax cuts and higher interest rates is nonexistent. Interest rates fell from stratospheric levels after the Reagan tax cuts in the 1980s but initially rose after the Clinton tax increase in 1993.

Additionally, the Bush tax cut is hardly the culprit behind declining federal revenues. Just as 4 percent annual economic growth rates created the huge budget surpluses, the tanking economy erased them. The static cost of the Bush tax cut for 2001 was just $38 billion (bearing in mind the unreliability of static analysis) compared to the triple-digit surplus we have seen disappear. Mathematically, the Bush tax cut cannot at this point be the main or even a major cause of the vanishing surplus.

Finally, those who belong to the Austrian school of economics may question a strategy of economic growth that is predicated on encouraging mass borrowing and consumption based on artificially low interest rates and monetary growth. Such a policy does not encourage production or real wealth creation, but would only increase the amount of bad investments in the economy.

It is sheer folly to blame a tax cut that will take place in 2005 for a recession or budget deficit now. Instead, marginal rate reductions should continue on an accelerated schedule. The advantage of this policy will be to increase the potential for a positive return on investments now and maximize the after-tax yield of productive economic activity. Such gimmicks as tax breaks for companies that hire new employees will only change move forward or backward investment and business spending already planned to take place, it creates no new incentives and fails to expedite the creation of any new wealth.

Daschle’s dubious economics should serve as a rallying cry to Republican voters in the 2002 election. Hopefully, Americans will pull their levers in defense of tax cuts.

Jim Antle

You can e-mail your comments to Jim at Jimantle@aol.com.

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Copyright © 2002 by W. James Antle III.
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