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The State Of The Union Address That Should Have Been


Economic Viewpoint

THE STATE OF THE UNION ADDRESS THAT SHOULD HAVE BEEN

The following draft of the State of the Union address was not delivered by President Bush:

My fellow Americans, the stubborn recession has given rise to demands for a quick fix. This is understandable. The slump has lasted longer than expected, and patience is not among our democracy's great virtues. So opportunistic politicians of both parties are now dusting off their pet nostrums and offering them as recession-busters.

The political pressure to "do something" is intense. I have been urged to grant tax relief to the middle class, to restore tax preferences for capital gains, to help the real estate and yacht-building industries, to create more tax breaks for homebuilding, and so on. No doubt, each such measure would buy me some political support at a time when I could sure use it. But a President is supposed to act Presidential--to do the right thing rather than the politically expedient thing.

Ladies and gentlemen, we must remember that the U.S. economy will outlast the November election. And the eyes of the President must focus steadfastly on that future. So, my fellow Americans, I have come here tonight to tell you that I have rejected the politically expedient course and to explain my reasons.

I understand why so many of you are clamoring for tax cuts. Times are tough--I know that. And a decade of shifting the tax burden away from the rich has created a prima facie case for redress on grounds of social justice. But those who demagogue the issue conveniently ignore a few facts. First, that the poor fared even worse than the middle class in the 1980s. Second, that Americans are not overtaxed; as a share of gross domestic product, mur tax burden is about the lightest in the industrial world. Third, that even after subtracting the effects of recession and the costs of deposit insurance, a structural deficit of about $200 billion remains in the federal budget. Fourth, that the U.S. has a long list of unmet public needs, ranging from funding Head Start to repairing dilapidated bridges. And fifth, that middle-class tax cuts are bound to mean a loss of revenue when the politically accepted definition of "middle class" includes almost everyone.

BIG SPENDERS. Political pundits have urged me to take steps to boost consumer spending before the election. Perhaps the crassest suggestion was to manipulate withholding schedules so that people would have more spendable income in 1992 and less in 1993. I told them that Americans are no fools, and rejected the idea. They also wanted me to let people invade their individual retirement accounts without penalty. Ladies and gentlemen, it's time we faced up to the fact that underconsumption is not America's problem. We are the biggest spenders on earth; it is in saving and investing that we fall short. Why, in 1991 we set a record by consuming 68.5% of our GDP. Should we drive this ratio even higher? What of our future? What of our children?

Knowing that the majority of voters own homes, cynical politicians are promoting schemes that would raise real estate values--like a $5,000 tax credit for first-time home buyers, or relaxing restrictions on tax shelters that were so painfully won in 1986, or allowing home buyers to tap their iras. My fellow Americans, the logic that drives these suggestions is political, not economic. The fact is that our country has not underinvested in real estate. We are the best housed people on earth, and the tax code already favors housing. The vacant stores and office buildings that now litter the American landscape not only remind us of the ways things were, but ensure us that relaxing restrictions on real estate tax shelters will merely raise property values, not create more jobs.

SLOW MEDICINE. And so, my friends, I have rejected the quick fix. But that does not mean standing idly by. The Federal Reserve has already lowered interest rates considerably, and Chairman Alan Greenspan assures me that further cuts will come if necessary. Unlike the fiscal nostrums you have been hearing about, the medicine of lower interest rates acts on precisely that part of the economy that needs the help--investment for the future, not consumption for today. Unfortunately, this medicine is slow-acting. So patients who take it--and that means all of us--must show a little patience.

For our part, the Administration must redirect its budget priorities toward the future. One thing that surely means is a smaller deficit. With the recession lingering, 1992 is the wrong time to trim the deficit. But we must not aggravate the long-run budget problem by giving away more revenue. Beyond this, the government must not scrimp on investments in America's future. That means public-infrastructure projects such as roads and bridges. But it also means investments in human capital, ranging from the poor children in early-childhood education to our top graduate students in science and engineering.

Together, we can make a brighter, more productive America. Just as all of you routinely invest in your families' futures, I am asking you tonight to face the facts and invest in America. Good night, and God bless you.Alan S. Blinder


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