President Bush is returning to the supply-side economic program of Ronald Reagan in promising across-the-board tax cuts and spending reductions to lift the economy out of the most prolonged economic slump since the 1930s.
The president`s plan, which was not described in detail, clashes sharply with Democratic nominee Bill Clinton`s proposal to raise taxes on the wealthy and spend much of the revenue on public investments.
Like Reagan, Bush would put pressure on Congress to cut spending to pay for his tax cuts.
His concept, in which every penny of tax cuts would be matched by spending cuts, bears the strong imprint of his new chief of staff, James A. Baker III, and returns his party`s economic policy to the strongly
conservative flavor of the 1980s.
Bush faces a greater credibility problem in selling the policy to the American people than Reagan did. For one thing, the Reagan plan led to the largest budget deficits in history, which the GOP to this day attributes to Congress. For another, Bush called a the plan ”voodoo economics” when he was running in against Reagan for the GOP nomination in 1980.
Americans also still remember Bush`s ”Read My Lips, No New Taxes”
promise, which he broke in 1990.
There is yet another problem. Will a program designed for the 1980s, when the economic challenges were much different, work in the 1990s, when a debt-ridden, less productive U.S. economy tries to compete in a global market?
The Bush plan provides no new stimulus to the economy, because tax cuts would have to be matched with spending reductions. But the supply-side philosophy holds that lower tax rates and a smaller government increase work effort, savings and investment.
In theory, this would be what the doctor ordered for an economy said to be underinvesting. The only problem is that this idea did not work in the 1980s. Reagan complained that he was double-crossed, that he got his tax cuts and military buildup but not the corresponding spending reductions.
The key difficulty with a plan like this is that to make significant spending reductions, the White House and Congress must make hard choices they have been avoiding for years, including some about cuts in federal social programs and other large spending programs such as defense.
In his speech, Bush said he supports a proposed cap on mandatory federal spending that would hold expenditures for entitlements such as Medicare, Medicaid and food stamps to the rate of inflation plus the growth in recipients.
Such an idea would save $300 billion over five years, Bush contends, enough to provide significant tax reductions.
But the Bush budget for fiscal 1993 outlined essentially the same entitlement spending cap, and it was shunned by Congress.
There is a chance that the proposal for a major tax cut could backfire. Congress could go along with the Bush idea but make the spending reductions in defense instead. The president has proposed a $50 billion cut in the defense budget, and Clinton $90 billion.
The president said he would impose an overall spending ceiling of his own, by vetoing any bill that breached it. If he is re-elected, this idea would set up a highly confrontational fight with Congress.
Bush`s one truly innovative idea was a proposal to put a box on income tax returns permitting taxpayers to check off as much as 10 percent of their taxes for debt reduction. He said he would reduce spending limits by the total amount checked off, cutting the deficit further.
Conservatives attribute the recession and economic slowdown to Bush`s support for the 1990 tax increase in a deal designed to balance the budget. Not only did the plan actually widen the deficit but it also cost Bush important credibility with the American people.
While Bush has supported reducing the capital gains tax to 15 percent from 28 percent, many critics say he has never pushed the idea aggressively in Congress. Bush, though, renewed his call for a capital gains tax cut in his speech.
The crucial problem for Bush is whether the public and the financial markets will believe that the new program can give a spark to the economy by expanding businesses that will create jobs.
By most economic yardsticks, many Americans remain uncertain and pessimistic. Real estate in many areas of the country is overbuilt, and not much new lift can be expected from tax cuts there. Many companies are restructuring their work forces by laying off employees and reneging on commitments to longtime employment.
This fundamental change in job stability expectations has had a profound impact on borrowing, lending and spending. Workers are reluctant to borrow for the long term with such uncertainty, and bankers are less willing to take risks.
With job fears so pervasive, spending has fallen. In such an atmosphere, businesses also shun long-term investment and expansion, a process that would create jobs.
”The one thing that bothers me is that I don`t see a future for my kids, except extreme competition for low-paying jobs,” said George Paluch, a real estate development consultant in the Chicago suburb of Homewood.
Paluch, a critic of the Reagan plan, said tax cuts actually might work this time around if they were made contingent on some kind of business investment that would lead to job creation.
But the Bush proposal contains no such linkages, although he previously has urged tax credits for business investment. Congress approved this, but Bush vetoed the bill because it also raised taxes on the wealthy.
How the financial markets receive the Bush plan also may be crucial to its success. When Baker gave the outline of it in a speech at the State Department last week, interest rates on long-term bonds rose, because it renewed inflationary fears of continuing huge budget deficits that must be covered by government borrowing.
