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Take back the tax cut

by Jeff Faux

As the new year begins, the economic future seems more uncertain than usual. We don’t know when the recession will end. Nor do we know when the war on terrorism will end-or even how we will know when it is over.

But there are a couple of assumptions that we can safely make.

First, whenever the recession ends, the U.S. economy is unlikely to return to the boom conditions of the last half of the 1990s. In the wake of the collapse of major companies like Enron and the loss of some five trillion in stock market value, it will take years to arouse the animal spirits of speculation that pumped up the economic bubble.

Second, intense competition from a deregulated global economy and the domination of short-term financial horizons will continue to fray the bonds of loyalty and commitment between employers and workers.

As a result, all the problems we were wrestling with before the boom will reappear. Slower growth will mean greater unemployment-particularly for those at the bottom of the wage ladder. With a safety net that is increasingly torn, hardship will spread. The long-term trend toward rising inequality, which was interrupted by the tight labor markets of 1996-2000, will resume. The health care crisis will get worse-not only will the number of uninsured and underinsured grow, but the cost of health care and the shifting of that cost to individuals will continue.

And with the bursting of the stock market bubble, the heady expectations that ordinary workers could speculate themselves to retirement security have deflated. The assets of many 401k plans are back to where they were in the early 1990s. With the disappearance of defined benefit plans, a growing crisis in retirement income is in the offing.

By now, it is obvious that the free market cannot solve these problem, and that government intervention in needed. One would think we would be in a good position to meet this need. In the 1990s, Clinton and the Congress worked single-mindedly to transform fiscal deficits into surpluses-and put off critical investments in education, public health, and transportation in the process. Now, the post-September 11 demands for spending on national security-including more foreign spending-will add to the list of unmet public needs.

From this perspective, George W. Bush’s $1.3 trillion tax cut over 10 years is as irresponsible a fiscal act as we have seen in our lifetimes. Already, the tax cut, on top of slower growth, has turned the forecast of surpluses into deficits until at least 2005. In other words, in the face of enormous increased public needs, the U.S. government will be borrowing money in order to pay for a tax cut that went overwhelmingly to upper-income Americans.

Repealing the tax cut ought to be the No. 1 public policy objective of progressives. But the obstacle is not just the president. The final tax cut of $1.3 trillion was a compromise between the president’s original $1.6 billion and the Democratic congressional leadership’s $900 billion.

The Democrats’ willingness to concede the tax cut principle is testimony to the effectiveness of the conservative campaign against government of the last 20 years. One dramatic symbol was Bill Clinton’s declaration in 1996 that “the era of big government is over.” But as the horrible events of September 11 revealed, it is far from over. In response, Congress and the White House tossed aside the balanced budget fetish and created a new homeland defense bureaucracy, nationalized the private sector business of airport security, and provided a $15 billion bailout to airlines on the grounds that the economy would be damaged if they were allowed to fail.

Of course, the bailout did not extend to the workers who lost their jobs and their health care. And that is the point. To a large degree the anti-government campaign has always been a smokescreen, obscuring the work of economic conservatives on behalf of their business clients. The big corporations and rich investors who invest in the laissez-faire think tanks spend even more money on big-time lobbyists who roam the halls of Congress and government agencies in search of subsidies, tax breaks, and influence.

So, the first step for political leaders in this uncertain climate is to get back their courage and tell the American people what the polls show they already know-accessible health care, retirement with dignity, and a rising standard of living for all require the leadership of democratic government.

Then, they should take back George W. Bush’s tax cut.

Return to EPI Journal Winter 2002