THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, January 14, 1995 TAG: 9501140009
SECTION: FRONT PAGE: A10 EDITION: FINAL
TYPE: Letter
LENGTH: Short : 43 lines
The current federal tax-cut proposals are just variations on the standard Keynesian policies of the past 60 years. Advocates of increased federal spending (military or civilian) have argued that every federal dollar has a multiplier effect: The person who receives the federal dollar pays it to someone else for goods and services, who in turn also spends it. Thus each $1 increase in the federal budget generates nearly $2 in economic activity.
Today the Republicans are using the exact same argument for tax cuts: Every dollar of tax cuts is one more dollar in a taxpayer's pocket, who then turns around and spends it, generating economic growth by the same multiplier mechanism.
The problem with both the Keynesian and the Republican arguments is that they are both right. Every dollar of tax cut will stimulate growth, but every dollar cut from the federal budget will shrink the economy by a similar multiplier effect.
Of course, one dollar in the private sector might have a greater impact than one dollar spent by the federal government. However, this is difficult to prove. Given our large trade deficits, the multiplier effect of tax cuts may benefit foreign economies more than our own.
There is a second reason why tax cuts will not produce a windfall of economic growth: the Federal Reserve Board. Traditionally, the Fed is charged with adjusting its monetary policy in order to balance economic growth and inflation. Recently, however, the Fed has adopted a strict policy of fighting inflation by raising interest rates, without regard to the negative effects on economic growth.
For the past year, every piece of good news in the financial press about economic growth has been met with increased interest rates. Any growth generated by tax cuts will be promptly choked off by interest-rate hikes from the Fed.
CHARLES E. HYDE-WRIGHT
Norfolk, Dec. 30, 1994 by CNB