Funny Money

When Federal Reserve Chairman Alan Greenspan testified before the House Banking Committee the other day, he was asked what he thought of the Republican-sponsored $792-billion tax cut package making its way through Congress. Not much, he answered.

For one thing, Greenspab said, the timing is wrong. The economy is doing well and doesn’t need stimulating. But “the business cycle is not dead,” he added, and when the next economic slowdown does come, a “significant tax cut” may be needed to hold a recession at bay. Far better, he suggested, to wait until then to reduce marginal tax rates. Meanwhile, most surplus revenues should go to paying down the $5.6 trillion national debt. That’s not the prescription his GOP interlocutors wanted to hear, but it’s one that makes good economic sense.

What’s driving the argument over whether and by how much to cut taxes are projections of federal revenues a full decade into the future. The 10-year tax cut plan the House passed last week assumes a surplus of about $1 trillion, in addition to a surplus of about the same amount in Social Security payroll taxes. But an assumption isn’t the same thing as real money. It’s valid only if certain expectations are met--about economic growth, interest and inflation rates, taxes collected. The truth is that no one knows what the future holds. Within a few years the federal revenue picture shifted from huge projected deficits to huge projected surpluses. The rapidity of this change underscores the foolishness of basing long-range tax policy on this month’s revenue projections.

If significant surpluses do develop, then using them to reduce the national debt makes great sense. The government would save billions in interest costs, making more money available for other valued programs. Private borrowing would be easier, helping to fuel economic growth from which everyone gains.

Opinion polls show no great clamor for tax cuts. Most people are more concerned about keeping Medicare solvent and improving the quality of education than they are about taxes. But the GOP is determined to make tax cuts the centerpiece of its 2000 platform and Democrats, with their own plan for $300 billion in cuts, are in a me-too mode. Both parties are playing with funny money, with tenuous and even fanciful projections rather than with dollars in hand. Both would do well to listen to Greenspan, who has won respect by being right a lot more often than he has been wrong.