Economic Stimulus?

RAY SUAREZ:

The President's ten- year plan, unveiled Tuesday, includes $674 billion in tax cuts and other provisions. It would end taxation of most stock dividends, boost the child tax credit by $400 per child, and accelerate tax cuts due to take effect in 2004 and 2006, making them retroactive to January 1st of this year. So is this the right fix for what ails the nation's economy?

We put that to two economists. Martin Anderson is the former domestic and economic policy adviser for President Reagan, and advised the Bush Presidential campaign. He is currently a research fellow at the Hoover Institution at Stanford University. Joseph Stiglitz was a member of the Council of Economic Advisors during the Clinton Administration. In 2001, he was awarded the Nobel Prize in economics. A former chief economist and senior vice president at the World Bank, he is now professor of economics and finance at Columbia University in New York.

Professor Anderson, let me start with you. What do you think is in the package of proposals and do you feel it will have the desired effect?

MARTIN ANDERSON:

I think it's a good package. Let me say why. When George W. Bush took office in 2001, he inherited a recession that had begun under the last administration. And a lot of the rosy forecasts that were around during the campaign about the large surpluses started to fade away. So he made a move and he tried to get his tax cut plan passed. The purpose was to keep economic growth going and create new and better jobs. The plan was passed, the concept but the Democrats spread it out over an 11 year period. The result is that as of today, 2003, we have received less than 10 percent of the tax cut. In practical terms, that means we have not had a tax cuts.

Since then, things have gotten worse. The economy is still stagnant and we have serious national security questions. We had 9/11, we were worried about al-Qaida, worried about Iraq, worried about North Korea. So it's critical to get the economy going again. And I think what Bush has proposed, his total package, is really critical to doing it. Let me say that I think the most important part of the package is the acceleration of the across the board tax cuts for every living American that is working. This means that your marginal tax rates will be reduced, everyone gets the cut. That's the critical part. The rest of the parts are good, they add to it. But cutting the rates across the board is key to stimulating this economy and getting it moving again.

RAY SUAREZ:

Professional Joseph Stiglitz, what do you think of the cuts and will it have the desired effect?

JOSEPH STIGLITZ:

I think if you were going to design a package to stimulate the economy, you couldn't have done worse. Even by President Bush's own Council of Economic Advisors they estimate this tax program will only reduce unemployment by about 190,000 jobs. That's two weeks of unemployment. It is not going to promote economic growth. Even their own forecast estimate that over a five-year period it will add about 1 percentage point to economic growth, .2 percent per year. Again, even if it is successful as their own CEA estimates, it will only do a small job of addressing the gap between the slow down in the economy of where we were performing in the 90s and where we are today.

Let me put it the following way: The economy is weak. Martin and I can agree about that. It needs a stimulus. How do you get a stimulus? Well, the way you get a stimulus is to get money in the pocket of people who are going to spend it. This current proposal couldn't be designed worse. Let me give you an example: The dividend tax cut that was mentioned, about 40 percent of that money goes to the upper 1 percent. 220,000 American taxpayers will get the same amount as 120 million people at the bottom. I don't view that as fair.

To put it another way: The Secretary of Treasury according to the numbers in the Financial Times is going to get a tax cut that is equal — roughly, to about 15,000 Americans in the 30 to 40,000 dollar tax bracket. The basic point is that what this economy needs is a stimulus. This is not a stimulus. The way you get a stimulus is to focus on where the economy is weak. Let me give you one example.

RAY SUAREZ:

And quickly.

JOSEPH STIGLITZ:

Right now states like California and New York are facing a real problem of budget stringency — because of slowdown and the mismanagement of last three years the tax revenues have fallen dramatically. The state faced a balanced budget constraint, which means that when their revenues go down they have to cut back expenditures or raise taxes. That is going to be a big dampener on the economy. The Bush proposal does absolutely nothing about that. In fact it makes it worse. It makes it worse in two ways.

RAY SUAREZ:

Give me just the one way. Professor Anderson has been trying to get his own..

MARTIN ANDERSON:

Let me just comment on one part of this. Many years ago was when I was a professor of economics, teaching economic as the Columbia we taught stimulus a little bit differently. The Democrats have proposed giving every $600. That's a gift. That might stimulate for a week or two when you go out and buy something. What you really need is to reduce marginal tax rates because if the taxes are reduced then they'll change the way they look at the income coming in. They will plan on it being a permanent thing. Before you attack me, let me finish what I'm trying to say: If people know that their tax rates are reduced, they know the income is coming in, the tax cuts are permanent they can start planning ahead. They can decide if they buy a house, they want to buy car, they can do things; they can act as if they have money in their pockets. But to give them $600 is silly.

RAY SUAREZ:

Professor Stiglitz?

JOSEPH STIGLITZ:

This is the old supply-side economics that Reagan pushed in 1981 that was supposed to lead to such a level of economic growth that deficits would actually be reduced. We know what happened after the Reagan tax cuts. What happened is we had the largest deficit in history.

RAY SUAREZ:

But what about Professor Anderson's point though that if people are able to shape their economic planning and the management of their own economic lives with some predictability down the road that they'll make choices that have stimulative effect on the economy?

JOSEPH STIGLITZ:

I think money should be gotten in the hands of average Americans. There's absolutely no doubt about that. The real question is that most of this money is going to go in the hands of a few people at the very top, the dividend tax cut. That dividend tax cut is not going to stimulate economic activity. Do you think the firms that have not responded to lower interest rates because there is excess capacity and high tech and excess capacity in telecom are going to all of a sudden start investing more in the U.S. economy because the dividends are cut? Absolutely not.

MARTIN ANDERSON:

Let me just say one word about the reduction in the taxes on dividends, that isn't the purpose of it. If you reduce taxes you pay on dividends you automatically will increase the value of stock. I mean, this is basic economics 101. Let's get back to the old supply-side business? This is current. Jack Kennedy did it in the 1960s; Ronald Reagan did it in 1982, passed a tax cut and kicked off an enormous economic explosion in this country.

JOSEPH STIGLITZ:

Let me –.

MARTIN ANDERSON:

Let me finish my point. There's a lot to attack, Joe. Look, it kicked off an enormous economic expansion. Revenues went up dramatically. And you know that.

JOSEPH STIGLITZ:

Kennedy's investment tax was an investment tax cut. It was targeted to increasing investment. That is what stimulated the economy. There are forms of tax cuts that will work. And I very strongly support those. An investment tax cut, particularly a net investment tax cut such as we proposed in 1993. What would be — would be something that would work. I can strongly support certain forms of tax cuts; the problem is, this is not the kind of tax cut that is going to stimulate the economy today. And as I said, even Bush's Council of Economic Advisors agrees that this is not going to increase employment significantly and is not going to promote growth significantly. So there's no disagreement between Bush and me on this we both agree this is not going to work.

RAY SUAREZ:

Professor Anderson, let's go back to the dividend taxation cut just as an example since it's one of largest components of the plan. If a wager earner has a thousand, two thousand bucks to invest and one buys a CD, one buys a bond, and one buys stocks that pays them a dividend, is the federal government in effect saying that one kind of investment is favored over another by the way it treats it for tax purposes?

MARTIN ANDERSON:

No. Let me just say I think what the critical thing about the reduction and taxes on dividends — people have argued about this for a long time m it's been an old thing in the economic profession for years as to whether you did a double taxation of money that's earned by corporations and then taxed as dividends. If you do not tax dividends, the dividends that they do pay make the stock more valuable.

Therefore it's not people buying stock so much as people who have got tremendous amounts of money invested in stock in terms of their retirement funds. I think the estimates are that those retirement funds would probably increase as much as 5 percent or 10 percent simply because of the fact you are not taxing the dividends. But, again, this is not the main part of what Bush is recommending. We keep moving away from the fact that he is saying every working American will get a reduction in their marginal tax rate. And this is a tremendous stimulus to the economy — at least it was when a used to teach it.

RAY SUAREZ:

Professor Stiglitz, how do you respond about that people fattening up people's portfolios — retirees, for instance, at a time in their life when they need it?

JOSEPH STIGLITZ:

Striking this is, those retirees, the average American retiree already puts his money into an IRA, a Keogh plan, a pension fund, and those are not taxed. They're not getting the benefit. The benefit is going to the rich people who don't have their money, or a retirement program but have money from some inheritance or a stock option or something like that. It's not going to the people who really need it and for whom when they get the money will stimulate the economy. Let me make one more point that Martin mentioned; he said the key point is the speed up in the celebration and the implementation of the 2001 tax cut. First let me point out that that is not where most of the spending is going.

MARTIN ANDERSON:

That's true.

JOSEPH STIGLITZ:

The big one is the dividend. That's where the dollars are going and the result of that increased deficit, everybody agrees including his colleague John Taylor who is now the Undersecretary of Treasury agrees that bigger deficits lead to higher interest rates and that's going to have a negative impact on many people, many firms.

RAY SUAREZ:

Go ahead.

MARTIN ANDERSON:

Let's stop on John Taylor. First of all, John Taylor strongly supports this program overall. Second, what we're talking about here is whether or not we should reduce marginal tax rates for every American who is working. We know that over the past history, it's been tried before, it does work. People respond to it.

And let me say one other thing. In 2001 we had a major debate. I think it's great we had this debate. We had a debate just like this in 2001. It was decided to pass the Bush tax cut as proposed except stretch it out. All Bush was saying look if that was a good thing to do in 2001, we need it much more today, let's just do it. Let's not argue about it. We already argued about it.

RAY SUAREZ:

Professor Anderson you heard Joseph Stiglitz talk about the possible effect on the deficits in the years down the road. Do you agree with his assessment that this puts the country in line for deficits along the road?

MARTIN ANDERSON:

Yes, and let me say one word about that. It is true if we do this you'll get an increase in the deficit. That is one thing Joe has right. Absolutely. If you look at the deficit as a percentage of our GDP, it's falling dramatically. It's now in the 30 percent range instead of 90 to 100 percent where it used. Let me say one thing about deficits. I don't like them. I think we should not have deficits.

But if there's comes a choice. Say for example you want to buy a house and it costs $200,000. I can save money for twenty or thirty years to buy the house, or I can go to a bank and borrow it. What we're doing because of the war, because of al-Qaida, because of Iraq, because of a low economy we're going to make a simple decision that we're going to borrow money temporarily and see if we can fix these items. If we don't, we're in real trouble.

RAY SUAREZ:

Very quickly Joseph Stiglitz.

JOSEPH STIGLITZ:

This is a permanent tax cut. It's not a one time thing.

MARTIN ANDERSON:

No, that's why it works.

JOSEPH STIGLITZ:

We want a stimulus to get the economy going now — that was like Kennedy temporary investment tax credit. That would work. What we're doing is really jeopardizing the long-term fiscal position. Let me address the point that Martin made.

RAY SUAREZ:

Very quickly, sir.

JOSEPH STIGLITZ:

If it was good in 2001, he says, why isn't it good today? As he pointed out, in 2001 the fiscal position — the numbers that were used were vastly different. We had a $3 trillion non social security ten year surplus then. We now have a $2 trillion deficit. That's a huge change in the fiscal situation which requires. —

RAY SUAREZ:

Gentlemen we're going to stop it there. Professor Martin Anderson, Professor Joseph Stiglitz, Gentlemen, thank you both.