Free Silver

by Coleman Kitchin

Our judicially appointed president seems to relish the notion of recession like a family heirloom. If the blowsy eight years of Clinton interrupted the dour rule of the Bushes, well then it is time to return to New England thrift, a blank storefront in winter behind which the pocketbooks of the wealthy will quietly grow fat. In other words, Bush's solution is a large tax cut, with very little tax reform or simplification.

If we are heading into a recession, then traditionally there are two things the government can do: use the Federal Reserve to reduce interest rates, and use the federal budget to pour cash into the economy.

And there are two ways for the government to pour cash into the economy: spending increases and tax cuts. Both tend to increase interest rates in the long term, by increasing the federal debt, and so somewhat blunt the tools of the Fed.

There are two phrases from politics past that seem to be lost in the current debate on Bush's tax plan, "trickle-down economics" and "grow the economy." Instead Democrats are in the ridiculous position of opposing a broad-based tax cut with their main critique that it will "return us to the days of runaway deficits." It's not especially good rhetoric, since the first thought that comes to mind is, "well only if we spend more."

But government spending is not just spending money. It is often an investment in the economy. Roads, bridges, educational grants and loans, research for agriculture and industry, ports and airports, public transportation and Coast Guard cutters: all pay off in the long run far more than they cost today. Not to mention social investment. A safe place to live and decent health care do more than mollify the mobs; they give people the chance to make a stake for themselves in the economy.

That is the kind of rhetoric our departed Democratic president, appearing so bold at the time, used to overturn what looked like a Republican lock on presidential politics, eight and a half years ago. Clinton explicitly rejected trickle-down economics, the very idea the new Bush is returning to us by asserting that a tax cut is the best way to stimulate the economy.

Far from the best way, it is simply the way that benefits the wealthy the most. And if it does result in higher interest rates, by preventing us from paying of more of the federal debt we have accumulated over the years, then surprisingly enough that could also benefit the rich.

It's a bit of old time economics from the days of the late 19th century, when populists would rally for "free silver," that is, for the government to create a low interest rate by expanding the money supply. People working their way up in the economy need low interest so they can invest in the tools to earn a better living. (A used car to get to a job, a mortgage on a house.) People at the top of the economy however benefit from higher interest rates because they have money in the bank. (Perhaps a new car dealership, a paid-for house, and second home, mortgaged for tax purposes!)

Times have changed, and it seems even wealthy investors have enough sense to favor a growing economy today. But a gloomy economy with tight credit does benefit some. Credit card departments in banks do well. And venture capitalists, those too rich to bother with the stock market, presumably can exact better terms from their targets when banks are not lending. Also old families with wads of money earning market interest find little trouble in this case.

It's not so much the "haves" and "have nots," as it is those who are growing, or could grow, versus a stagnant top tier.

One likely outcome of Bush's policies is an economy stimulated enough by a tax cut that the Fed will use high interest rates to keep it under control (keep inflation down). This would be a bad deal for those at the bottom of the economy, since they have no taxes to lose, but require credit to improve. Those in the middle would get a tax break but high interest and little upward mobility. Finally, tons of money that could be spent on infrastructure would go to those at the top. Arguably a large proportion of it would be used unproductively.

If this scenario is correct, then indeed we have big players, like Bush, who see no problem in a moderately paced economy with high interest rates to keep it in check, and little social investment, or social movement.

And that's the optimistic scenario. Let's not even imagine a sagging economy with a looming deficit and all the rest of trickle-down.

Remember this slogan?: "Grow the economy."

How about this one?: "It's the economy, G.W."