The Selling of the Tax Cut: First Stop Greenspan

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Matt Mendelsohn / Corbis

Who knew selling a trillion-dollar tax cut could be so hard?

A big tax cut used to be the best bribe in politics, a payoff to the people that never failed to win support or votes. Then came Ross Perot and the Greenspan-Clinton deficit-reduction plan of 1993, which kicked off an eight-year economic paradise of balanced budgets, high growth and low inflation. Tax cuts, especially tax cuts for people that already had money, were selfish and irresponsible.

Surpluses that seemed to go on forever

But then came the surplus, a $4.6 trillion paper windfall on which Al Gore and George W. Bush sketched out their competing ideologies and Clinton presented as his legacy. But voters, rightly, were a little skeptical.

The surplus that seemed to go as far as the eye could see suddenly made tax cuts a stump speech staple again. "It's your money," Bush used to say — and soon the targeted vs. across-the-board debate reared its head as a partisan issue. But in the fight for the swing voters who had slowly learned to love fiscal discipline, tax cuts were not high on their presidential to-do list. Perhaps the best that could be said of Bush's $1.3-trillion-dollar baby is that it didn't cost him the election.

These are the post-Clinton political seas into which George W. Bush will launch the $1.3 trillion across-the-board tax cut that was first conceived by the Bushites to sink Steve Forbes in New Hampshire. It's a tough sell. Voters would take a tax cut — who doesn't want more money? — but the size scares them. Republicans have always depended on tax cuts, but know that the size makes them vulnerable to getting out-empathized by Democrats. And Democrats know that Bill Clinton gave small, feel-good targeted tax cuts a very good name.

Welcome to what George W. Bush envisions as his rite of passage from back-door president to national leader: the selling of the tax cut.

The Bush sales plan

First, we can afford it. Despite the gloomy economic outlook in the short term, reinforcements are coming. In February, the Congressional Budget Office announces a new 10-year surplus projection that is already expected to add up to $6 trillion. That's $1.4 trillion more than the current figure.

The CBO's projection expects government spending to stay level, which it won't, and for certain existing tax credits to be allowed to expire, which they won't. (And a real, multi-year recession would of course make those surpluses disappear very fast.) But an extra $1.4 trillion is a heck of a lot of breathing room, and Democrats will be hard-pressed to argue that even Bush's now-enlarged proposal (it's $1.6 trillion from 2002-2011 instead of the old $1.3 trillion from 2002-2010) will break the fiscal bank.

We can't afford not to do it. This has been Bush's way of softening the fiscal ground ever since the fall. The economy is slowing down. Consumer confidence is fading, the "wealth effect" of the rising stock markets is a pleasant memory, and the best way to head off a recession — consumer spending accounts for two-thirds of U.S. economic activity — is to put some spending money back in the people's pockets.

The economic sense of this argument is, well, arguable. Interest-rate cuts take six months or longer to make a real impact on the economy, and Alan Greenspan implements those with a wave of his hand. Bush's tax cut faces a long road through Congress, and of course part of the argument he used during the campaign — back when everybody worried that it would overstimulate a red-hot economy — was that the cuts would be phased in so gradually that no one would notice.

We can fix that. Bush will likely send the plan to Congress as is already, but he knows that's just the beginning. ("The president proposes, Congress disposes" is the official catch-phrase.) And Bush has signaled his willingness to frontload the plan a little to get that spending cash on the street in time for it to do some good.

But it still won't be fast enough. If spring 2001 is indeed to be a season of recession, Alan Greenspan will have already waded in and out by the time the Bush tax cut gets to the negotiating phase. And if the landing is soft after all, then Greenspan will have saved us already.

But Greenspan has left Bush a handy platform in the meantime. A growing chorus of economists think Greenspan's last half-point hike in May was overkill, and that the slowdown is indeed happening too fast. The markets are demanding a full point of interest rate cuts from the Fed chairman in the next six months, and many expect him to begin with a surprise, pre-FOMC-meeting cut in the next few weeks, coming perhaps as soon as the next unemployment figures, due out in early January. That would only help Bush set a properly gloomy mood.

The Big Kahuna

But these days, Americans and their politicians trust one economic oracle — and Greenspan is it. And Bush's tax cut will be a snowball in Palm Beach unless the Fed chairman gives it his blessing.

That was the primary purpose of Bush's well-handled Breakfast at Greenspan's last week. It's also why an ALCOA tin man is heading up Bush's treasury: Paul O'Neill, and Dick Cheney, go back three decades with the fed chairman, and a good relationship with the Fed can be a big help, especially when your old man didn't get along so well with Al. Greenspan will get his chance to sign off when he testifies before Congress this winter.

Greenspan has told Congress debt reduction would be first on his economic wish list. Deficit reduction was his idea in 1993, and now that there's no deficit he'd like the next president to continue to whittle down the national debt for the same reasons: lower long-term interest rates, lower inflationary risks, less government spending on debt servicing. An all-around good thing.

But Greenspan is also a Republican and a free-marketer, and he told Congress that he prefers tax cuts to new programs, as long as they don't flood a thriving economy with cash and pose an inflation risk. (By his own job description, Greenspan's main obsession is fighting inflation.) But Greenspan is fully aware that this business cycle, even in its current flattened form, is closer to the trough than the apex, and that's largely his doing. Tax cuts may not be the answer to the slowdown, but they probably wouldn't hurt.

It's the spending, stupid

The dealbreaker will be fiscal discipline. Greenspan's own view of the surplus's long-term viability will be a major factor, and you can bet he's skeptical about not only the wisdom of any 10-year economic forecasts but politicians' ability to keep spending in check. But here the CBO's new numbers should come into play again — that surplus may be part fantasy, but at least it's getting larger.

Bush's people will remind Greenspan that giving back $1.6 trillion in tax cuts sure beats $1.6 trillion in new spending, and that if the budget gets tight a few years hence, a tax cut is a lot easier to ditch than an entitlement. And with the CBO's accountants drowning in black ink, taking the money off the table is a hedge against the bloated budgets of the future. Heck, it might even perk up the markets a little bit in the meantime.

If Greeenspan finds himself making emergency rate-cuts this winter to soften the slowdown that he himself started, it may be hard for him to deny an incoming Republican president his pet project, as long as Bush is both sensible and polite about it. After putting Clinton (and himself) in the Fiscal Policy Hall of Fame, though, he's not going to rubber-stamp a tax cut because George Bush's son asks him to, even if young George sends mutual friends to do the asking. Greenspan has a legacy of his own to worry about.