Dec. 09, 1991: The Recession:A Time for Leadership
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TIME--The Weekly Newsmagazine--1991
Dec. 09, 1991 One Nation, Under God
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<source>Time Magazine</source>
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NATION, Page 22
THE RECESSION
A Time for Leadership
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<p>Suddenly it's fashionable to call for tax cuts. Are the
politicians trying to build growth for the '90s or just win
elections next year?
</p>
<p>By Dan Goodgame/Washington--With reporting by Nancy Traver/
Washington
</p>
<p> No one, not even George Bush, was denying that the
economy was sputtering. There was considerably less agreement
over whose fault it was--and what should be done about it.
Eager to take action before facing angry constituents during the
holiday recess, lawmakers in both parties rushed forward with
quick-fix tax-cutting schemes. But their ability to spur real
economic growth seemed doubtful. All the plans--Republican as
well as Democratic--would cut taxes by borrowing billions and
billions of dollars, further swelling the budget deficit. All
would require renegotiation of last year's budget agreement,
inviting a fresh outburst of federal spending, which would drive
interest rates up and send the stock market down.
</p>
<p> Anxious to avoid such consequences, President Bush says
his economic policy has long been guided by a Hippocratic
principle: above all, do no harm. The public, however, has grown
impatient with the economy's sluggish growth. GNP grew 2.4% in
the quarter that ended Sept. 30, or only half the rate for the
average postwar recovery, and the curve is thought to have
flattened out since then. "People will not believe we're out of
recession until they see companies hiring," says an
Administration economist, "and that's not happening yet."
Unemployment, at 6.8%, is far lower than the 10.8% at the peak
of the last recession, in 1982, yet consumer confidence was
higher then than it is now.
</p>
<p> "It's very important to change this psychology," says
Lawrence Hunter, acting chief economist for the U.S. Chamber of
Commerce. "Every time we see a new consumer or business poll,
people feel more vulnerable. And that makes the President
vulnerable." Bush's weakness was apparent last week in a
TIME/CNN poll that put his approval rating at 46%--down from
86% in March. It was the first time since taking office that the
President's approval dipped below 50%. Bush's handling of the
economy was rated "good" by only 18% and "poor" by 74%.
</p>
<p> Faced with rising public concern, both parties in Congress
made clear last week that some form of antirecession
legislation, including a broad-based tax cut, will be passed
early next year. "There's going to be a tax-cutting parade on
Pennsylvania Avenue," says a Bush adviser. "The only question
is whether the President wants to be at the front or the rear."
</p>
<p> Bush was not leading any processions last week. Nearly
half of the 166 House Republicans expressed alarm at the
Administration's do-nothing policy and urged the President to
appoint Housing Secretary Jack Kemp as his chief domestic policy
adviser. Led by House minority whip Newt Gingrich of Georgia,
they threw together an economic-growth package aimed at
countering Democratic tax-cut proposals. Bush fumed privately
over the Republican initiatives, promising to unveil his
economic blueprint in the State of the Union address next month.
But as pressure for action continued to rise, the President
finally gave grudging support to Gingrich's plan, then
challenged the Democrats to vote on it in the final hours before
the holiday recess.
</p>
<p> Bush wound up backing the worst of the nine tax-cutting
schemes vying for support on Capitol Hill. Combining deficit
financing with favoritism toward the wealthy, Gingrich would cut
the tax on capital gains from the sale of such assets as stocks,
bonds, real estate and timber. He also would give new tax breaks
to upper-income investors in IRAs, end the 10% "luxury" tax on
purchases of expensive items such as yachts and furs, and
restore tax shelters for real estate losses.
</p>
<p> The Gingrich plan would be a bonanza for the 2% of U.S.
taxpayers who earn $200,000 or more. Their taxes would be cut
an average of $11,561--enough to buy a new Pontiac Grand Am.
The average household earning $35,000 would get a tax cut worth
$65, enough to drop a new battery into the family Chevy. House
Speaker Tom Foley charged that "the Republicans merely want to
shower another round of benefits on the richest people in this
country."
</p>
<p> Gingrich claims that his tax cuts would encourage so much
new investment that they would pay for themselves--a promise
made and broken throughout the 1980s when President Reagan and
the Congress slashed income taxes while boosting defense and
entitlement spending, paving the way for the unprecedented $346
billion budget deficit that is projected for this year. The
Congressional Joint Tax Committee estimates the Gingrich plan
would require an additional $23 billion a year in federal
borrowing.
</p>
<p> The leading Democratic plan is authored by Dan Rostenkowski,
chairman of the tax-writing House Ways and Means Committee. It
would restore some fairness to the federal tax system, which
under Reagan and Bush nearly doubled Social Security payroll
taxes on middle-income wage earners while lavishing income tax
cuts on the wealthiest 5% of Americans. Rostenkowski would give
working families an income-tax credit equal to a fifth of their
Social Security taxes, up to a maximum of $400 a year, over the
next two years.
</p>
<p> To offset the estimated $46 billion in lost revenues,
Rostenkowski would raise the top marginal tax rate from the
current 31% to 35% and add a 10% surtax on taxable incomes over
$1 million. Rostenkowski's plan, however, would not match
revenue with expenditures for at least two years and would
require at least $25 billion in additional federal borrowing.
</p>
<p> In response to Bush's efforts to blame Congress for the
recession, Rostenkowski scheduled hearings to begin this week
on the various proposals to cut taxes and otherwise encourage
faster economic growth. He has called as his first witnesses
three of Bush's top economic advisers: Treasury Secretary
Nicholas Brady, Budget Director Richard Darman and Council of
Economic Advisers chairman Michael Boskin.
</p>
<p> The hearings have intensified an internal White House
debate over economic and political strategy. One faction, led
by Brady and joined for the most part by Darman and chief of
staff John Sununu, advocates doing as little as possible. They
fear that a tax-cut bidding war with Congress will get out of
hand, deepen the deficit and drive up interest rates. Other top
officials, including Kemp, Boskin and Vice President Dan Quayle,
argue that the best way to bring down the deficit in the medium
term is to turn the economy around with tax cuts, even at the
cost of additional federal borrowing in the short term.
</p>
<p> Some members of the "do-something" faction contend that
precisely because the recession has grabbed the country's
attention, Bush has a rare opportunity to reinvigorate U.S.
industrial and tax policy. Should he choose to do so, these
advisers say, Bush need not confine himself to the "growth
package" he sent to Congress three years ago. Other good ideas
are available from economic experts inside and outside the
Administration. Among the most promising:
</p>
<p> Cut the payroll tax for Social Security and Medicare. This
regressive tax has nearly doubled over the past decade, to 15.3%
on the first $53,400 of income, split equally between employers
and employees. Three-fourths of Americans now pay more in FICA,
as it is generally known, than in federal income tax. Of all the
taxes the government collects, economists say, Social Security
acts as the strongest deterrent to the creation of new jobs.
</p>
<p> Cut the capital-gains tax from 28% to about 20%. Bush has
long proposed this, but the cuts should be limited to new
investment. Otherwise the wealthiest Americans, who are already
sitting on large capital gains, will receive a huge tax windfall
at a time when the middle class is suffering.
</p>
<p> Restore the 10% investment tax credit. Bush is expected to
recommend this next month, but the credit should apply only to
new plant and equipment, rather than to maintenance and real
estate.
</p>
<p> Increase taxes on gasoline and other fuels. This would
help finance cuts in other taxes--each penny-per-gallon
increase in the gas tax would generate $1 billion in new
revenues--and would also encourage energy conservation, cut
down pollution and traffic congestion, and reduce the U.S. trade
deficit. A good start would be an increase of 25 cents per gal.--less than the amount by which prices rose during the gulf war--with further increases of 5 cents a year. Special rebates
could be given to the poor.
</p>
<p> Make far deeper defense cuts. Though the threat of a
conventional Soviet thrust into Western Europe evaporated with
the end of the cold war, Pentagon spending has not dropped
significantly. The Pentagon's own internal studies show that its
budget can accept further cuts of $50 billion over the next five
years without endangering national security.
</p>
<p> Cut federal welfare spending for the wealthy. The major
entitlement programs--Medicare, Social Security, farm aid--give huge subsidies to retirees and farmers who earn more than
$100,000 a year. At the very least, Social Security payments
should be fully taxable; this will not hurt the needy, but it
will in effect reduce the benefit to those who are already well
off. Potential savings: more than $30 billion a year.
</p>
<p> Phase out special-interest tax breaks for the wealthy.
Affluent Americans should no longer be subsidized by tax
deductions on mortgages for mansions, second homes and vacation
homes, on inherited capital gains, and on corporate
entertainment. Even if the potential savings amount to only $29
billion a year, such a move would be a strong signal that the
burden of hard times will be shared equally by all Americans.
</p>
<p> Boskin, the chief White House economist, recently said the
Administration's approach to the recession seeks "both to help
the economy in the short term and to make sense over the long
run." If that is his aim, Bush must move beyond merely doing no
harm, and beyond popular tax cuts, to build a foundation for
U.S. economic growth in the 1990s. He has shown the world he can
win a foreign campaign. He must now show his countrymen how to
