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Tip
Sheet: Business, Law & Economics Tip sheets highlight timely news and events at Washington University in St. Louis. For more information on any of the stories below or for assistance in arranging interviews, please see the contact information listed with each story. For comments on the Business, Law & Economics news tips service, please contact the editor, Robert Batterson at (314) 935-5202 or batterson@olin.wustl.edu. President Bush's economic plan ignores states' fiscal crisis; Democrats too worried about deficits Media assistance: Gerry Everding - (314) 935-6375 Source: Steven M. Fazzari's Web page - (314) 935-5632 [St. Louis, Mo., February 2003] - The economic plan that President Bush has proposed provides little short-term stimulus to the economy for its size and neglects a growing fiscal crisis in state budgets, according to Steven M. Fazzari, chair of the economics department at Washington University in St. Louis. But Fazzari also says the Democrats' plan worries too much about short-term federal budget deficits, which are actually beneficial in times of economic weakness to provide a much-needed stimulus.
Fazzari says that the barrier to investment is not the taxes paid by shareholders, but the lack of demand for products and weak corporate profitability. Expanding the child credit and accelerating planned tax cuts for low and middle-income people will help, but these changes are too small in the Bush plan, he says. He also finds that the fiscal situation for the states that must balance their budgets is an "under appreciated crisis." "As the states' tax revenues fall with the weak economy, states must cut essential services, such as education and medical care. These actions not only hurt those who must sacrifice services, they also magnify the national economic weakness by laying off state workers at a time when government should be helping to solve the unemployment problem, not adding to it. The Bush plan does nothing for the states." The Democratic plan, meanwhile, focuses too much attention on the federal budget deficits, says Fazzari. The Congressional Budget Office (CBO) projects the deficits will reach $199 billion this year and $145 billion in 2004 -- without a war and the Bush tax cuts. The president's proposed budget, meanwhile, includes a deficit of $307 billion next year. "The Democratic plan provides more direct stimulus to the economy in the short term, and it distributes the direct benefits of that stimulus more broadly across income groups. It also addresses the states' fiscal crisis," says Fazzari. "But the Democrats are too concerned about the deficits. There is little evidence that moderate deficits do harm to the economy, such as raising interest rates. Rather, deficits at a time of economic weakness provide a much-needed stimulus." As the economy begins to roll forward again, Fazzari says incomes and tax revenues will rise, offsetting the deficit problems, as they did in the middle 1990s. "But deficit concerns, in general, are exaggerated by Democratic rhetoric and pose barriers to effective stimulus policy," he says. The Washington University economist cautions, however, that concern about long-term deficits may make sense in criticizing tax giveaways that have little economic stimulus potential, such as the elimination of taxes on dividend income. |
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