-Caveat Lector-
Senior Economists Cast Doubt on U.S. Tax Plan
By Tom Buerkle
International Herald Tribune
Friday, January 26, 2001
DAVOS, Switzerland Senior international economists remained
distinctly skeptical about the merits of the tax cuts proposed by
President George W. Bush despite the apparent conversion of the
Federal Reserve Board chairman, Alan Greenspan, to the cause of
tax reduction on Thursday.
The economists, who were participating in the World Economic
Forum here, were unanimous in rejecting the idea that tax cuts
are an effective antidote to the slowdown gripping the U.S.
economy. Given the time needed to win political support for tax
cuts, any reduction would likely take effect when the economy was
already in recovery mode, they said.
"I think it requires an unwarranted leap of faith to think you
can time a tax cut well enough" to avert a recession, said Alan
Blinder, an economics professor at Princeton University and
former Fed vice chairman.
Jacob Frenkel, chairman of the sovereign advisory group at
Merrill Lynch Co. and former head of Israel's central bank, said:
"By its nature, you will end up fighting the previous war. We
have learned too many times that the fine-tuning does not work in
this way."
The economists made it clear that their opposition was focused
specifically on the $1.6 trillion tax cut proposed by Mr. Bush
during the campaign, not on tax cuts per se. "I think they're too
much," Mr. Blinder said.
Mr. Greenspan's endorsement of tax cuts in Congressional
testimony Thursday went much further than his qualified
expressions of support in the past, but he refrained from
commenting directly on the Bush package.
He also appeared to straddle the question of timing. He noted
that past attempts to cut taxes "have proved difficult to
implement" in the time frame of recessions, but he added, "should
current economic weakness spread beyond what now appears likely,
having a tax cut in place may, in fact, do noticeable good."
Mr. Frenkel said he had spoken privately with Mr. Greenspan about
tax cuts and was in full agreement with him. Tax cuts are good
for bolstering long-term supply incentives in the economy, not
for moderating the business cycle, he said. "Have a tax structure
that's good for the winter and the summer, not a Mickey Mouse
plan to deal with the ups and downs of the economy," Mr. Frenkel
said.
Juergen von Hagen, professor at the Center for European
Integration Studies at the University of Bonn, expressed concern
that tax cuts could worsen the U.S. current account deficit by
stimulating more consumption that increases imports.
Others worried that fresh fiscal stimulus could tie the hands of
Mr. Greenspan and limit the potential for interest-rate
reductions. That concern was evident in the U.S. bond market on
Thursday as prices fell, and yields rose, as some participants
downgraded their expectations for rate reductions.
"The real problem with these tax cuts is they disturb monetary
policy," said Kenneth Courtis, a senior economist at Goldman
Sachs Co.
Mr. Greenspan may have few such fears because he is aware of the
long and uncertain timetable that will confront any tax plan that
Mr. Bush sends to Congress. In this view, the chairman was
demonstrating political astuteness by supporting tax cuts in
principle but giving himself plenty of room to argue about the
details later on.
As Mr. Blinder put it, "no Fed chairman wants to pick a fight
with a new president right off the bat."
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