The old argument: Should taxes be cut or government spending increased?

Posted: Friday, November 02, 2001

NEW YORK (AP) -- Again, as so often before, the country is facing the question of whether it is wiser for government itself to try spending the economy up from recession or turn the task over to the private sector.

The issues this time aren't cleanly split along political lines, but the dispute is still there: Is it best to induce the economy into heightened activity by means of tax cuts for business and households, or instead directly earmark subsidies for industries, health insurance and jobless benefits?

Inherent in the tax-cut argument is a belief that the less government involvement, the more bountiful are the economic benefits, while advocates of direct spending believe their approach can better focus on needs.

Alas, the arguments aren't as philosophically pure as they might seem.

Business excutives who rail against government's growth may also lobby for government favors. Supporters of direct government spending may waste public money on pet projects offering minimal economic benefits.

Now there's a new consideration: With consumer confidence at a low ebb and business spending plans on hold, what assurance is there that the private sector will spend rather than save the benefits of tax cuts?

Terrorism is the new factor, manifested by inaction in the marketplace. Nine interest-rate cuts by the Federal Reserve and billions of dollars in tax rebates have done little to date to stir up action.

The question now is whether additional financial stimuli will induce consumers to board airplanes and congregate at malls, and businesses to believe sufficiently in the future that they will plan and spend for it.

Conservatives nevertheless contend that financial inducements such as low interest rates and tax cuts are the only way to go. They offer as examples the economic growth after cuts by Presidents Kennedy and Reagan.

Economist Ronald Utt of the Heritage Foundation maintains on the other hand that direct government spending inevitably fails. The massive government pump-priming of the 1930s, he says, produced only a 2 percent economic gain from 1929 to 1938.

For American workers, he writes, ''the failure of this spending spree to do anything more than expand the deficit and bureaucracy was devastating.'' Among other results, Commerce Department figures show the jobless more than doubled from 2.8 million in 1930 to 6.9 million in 1940.

Whatever comes out of Congress this time is likely to be a hybrid of compromise, but the economic evidence indicates something has to be produced, and soon, or the economic downturn is likely to deepen.

In fact, whether or not the U.S. economy is already in recession is only a matter of concern for semanticists and statisticians. Effectively, the economy has stalled and the conditions stalling it haven't budged.

It means the arguments, pro and con, for tax cuts or against them, for direct government spending or against it, can't remain deadlocked in Congress while the economy falls into a deep chill.

End Adv PMs Thursday, Nov. 1

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