Now may be time to map new path for US economy
Economist Otto Eckstein sees the current recession as "an extraordinary opportunity to put the US economy on a better development path for the 1980s." In testimony to the Joint Economic Committee last Friday, Dr. Eckstein said: "So far, the administration has firmly applied the good old ideas of demand restraint and credit scarcity to create the recession and unemployment necessary to take the immediate inflationary steam out of the economy.
"Having paid the political price of starting the recession, and making the society pay the human price, the administration and the Congress now have the oppurtupity to reap the benefits of the recession and to apply new ideas to get a solid start on the solution of our long-term problems."
The political and human price of a recession are huge. The riot in Miami, though involving the special issue of equality before the law, shows to some degree the emotions and problems roused by high unemployment rates. The fight against inflation is not costless.
However, inflation too is destructive to society. It tends to erode honesty, industry, and thrift. It tempts some individuals to "protect" themselves from the impact of poor government management of the economy by cheating on taxes. This may partially explain the rapid growth in recent years of the "underground economy" -- economic activity unreported to the Internal Revenue Service. Inflation robs the saver in favor of the debtor. It creates greater economic uncertainty that prompts businessmen to be more cautious in their investment plans and causes individual to look for immediate returns rather than long-terms gains, to spend now rather than for the future.
Whatever the tradeoffs between inflation and recession, the nation has embarked on a recession cure for inflation. So Dr. Eckstein was suggesting to Congress that this event be used to provide greater incentives for industrial capital formation. This would provide the means for more investment in new plant and equipment, boosting national productivity.
This is the top theme song of business organizations nowadays. There has even been formed in Washington a new lobbying organization of business and individuals in business calling itself the Council for a Competitive Economy. It is pressing for special tax breaks for business -- not, one should note, an unusual posture for business groups.
What makes Dr. Eckstein's testimony interesting is that as president of Data Resources Inc., a Lexington, Mass., economic research firm, he has provided an econometric analysis of the impact on the economy of various sort of tax cuts.
There are other computer-based, heavily mathematical studies of so-called "supply side" tax cuts -- tax measures aimed at boosting the supply of goods and services to the economy rather than stimulating demand by consumers for these goods and services.
But the results of Dr. Eckstein's mathematical models are relatively modest in their claims for the benefits of such tax cuts. One of his staff economist, Frank Cooper, noted that it would be a mistakes to see some "magic" on the supply side bringing the economy suddenly back to the low inflation rates and high productivity gains of the 1950s and early 1960s. But such tax cuts will help some "eventually," he says.
Dr. Eckstein, also a Harvard University economics professors, does advocate personal income-tax cuts. Without them, the economy will sustain the most severe tax increases since the outbreak of World War II, he noted. New energy taxes would raise $25 billion by 1981, payroll taxes an extra $23 billion, and inflation would boost personal taxes $28 billion. He suggest tax relief be split 50-50 between business and individuals.
"I urge you to focus the personal cuts on the middle brackets of workers, in the $10,000-$25,000 income range, rather than to provide additional relief to the upper-income brackets that gained under the tax reform act of 1978, or the low-income brackets where the burden has been cut very sharply over the last decade," he told the Joint Economic Committee.
Looking at various proposed business tax cuts, his model finds that a $1 billion cut in personal taxes would boost the potential output of goods and services by 0.16 percent by 1985 and trim inflation by 0.003 percent. In other words, it woudn't have much impact.
on the other hand, cuts in the corporate tax rate, an increase in the investment tax credit, or depreciation reform would have more sizable benefits, especially in stimulating increased output. Depreciation reform, for instance, would increase potential gross national product 1.16 percent and decrease inflation 0.071 percent.
What these numbers indicate is that supply side tax cuts won't do much to reduce inflation.
However, they might increase output somewhat, though the actual percentages offered by such models should not be taken too seriously. "I take all these estimates with a large grain of salt," noted another leading econometrician. Economic models aren't very accurate in such predictions.
Moreover, if business tax cuts stimulate industrial investment, that money might come from housing or training as well as from consumption. It too might have some undesirable side effects.
Thinking of such economic policy tradeoffs, Data Resources' Mr. Cooper Commented: "I'm glad I'm not a policymaker."