Until now, it seemed, the Democrats were united in the idea that taxes should be cut far less than the $1.6 trillion the Bush Administration proposes for the next 10 years. But two new reports from economists at the liberal Jerome Levy Economic Institute argue that large and growing federal budget surpluses are an enormous drag on the economy--and that, in fact, the Bush plan is much too small. Both reports, one by Wynne Godley and the other by Dimitri B. Papadimitriou and L. Randall Wray, call for cuts that are three times what the White House wants. And that's a conservative number, says Wray of his $4.8 trillion proposal: "It could easily turn out to be too low."
What worries Wray and his colleagues is that business and consumer spending, buoyed by record levels of borrowing, will fall sharply as the economy stalls. That spending drop will be especially painful because economic growth is already constrained by huge and growing federal budget surpluses, revenue excesses that the Congressional Budget Office projects will rise from 2.4% of gross domestic product in 2000 to 5.3% of GDP in 2011 unless taxes are cut (chart). The result could be a serious and long recession, the authors say.
The plan by Papadimitriou and Wray, which includes the Bush cuts but adds payroll-tax relief and expands credits for families, is designed to help the economy now and in the future. In the near term, it offers about $450 billion a year to offset the expected cutback in household spending during the next few years. Over the course of the decade, it brings government revenue in line with public outlays so surpluses don't continue to weigh down the economy. By Charles J. Whalen