Thinking Things Over: Accounting Fictions 1, Stimulus 0
In the homestretch of the presidential campaign last October, I wrote a column noting that earnings warnings were suddenly papering Wall Street, "By the time you clearly need a stimulative tax cut it's too late to get one through the congressional labyrinth," it observed. "A good time might be right now."</br></br>Perhaps Alan Greenspan had stopped tightening just in time to engineer a "soft landing," I speculated, but if this rosy scenario did not materialize he "may be short of maneuvering room." Oil prices were already signaling that a downturn could well be accompanied by a danger of inflation. So if George W. Bush actually won, "his tax proposal may be on the table none too soon."</br></br>This has pretty much worked as advertised, except that it's too bad George W. Bush didn't propose a stimulative tax cut.</br></br>Well of course, the tax proposal President Bush sent to Congress is the same one candidate Bush had on the table in October. And with its attention to across-the-board marginal rate reductions, it certainly was a stimulative one when compared with Al Gore's tax proposal, a hodgepodge of spending programs in drag. But the economic downturn has become much clearer. Perhaps the economy will yet rebound in the second half; leading indicators rose in January after three months of decline, and Friday's employment figures were encouraging. Still, with earnings declines and even layoffs spreading, stimulus soon would be only prudent.</br></br>The Fed stepped up to the plate by lowering its short-term interest rate target, but the president has made no similar adjustment in his tax proposal. In the current environment, its long phase-in can no longer be overlooked. Experience warns that tax cuts usually stimulate only when they become effective. A phase-in creates incentives to delay income, perhaps making a downturn worse.