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75 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0072 and id is 1 raw text is: Congressiona January 4, 1999 No. 75 WE STILL NEED A GOOD TAX CUT The Federal Reserve has lowered short term interest rates three times since late September. On December 3, central banks of the 11 European Union nations moving to adopt the Euro as [Tihere is dai their common currency the Presi coordinated an interest rate cut. govewnents Japan is assisting its struggling Union and J banks with a major capital easing Of mot infusion. ... central banks, The U.S. and European bank bailout, interest rate reductions were needed chang fully justified by declining fiscal and regi inflation fears and by the associated fall in long term market interest rates on government bonds and other low risk securities. The central bankers were as much following market trends as leading them. The monetary authorities were also seeking to reassure credit If t U e markets that the Asian turmoil would not be allowed to cause economies in worldwide credit market spending auth problems, and to boost on the laure liquidity in the face of authorities. increased nervousness about holding riskier securities. Unfortunately, there is danger that Congress, the President, and the governments of the European iger- t, of e tariy and ?s in t ulator states to 1999, oritie 's of Union and Japan may view the easing of monetary policy by the central banks, and the Japanese bank bailout, as substitutes for needed changes in their respective fiscal and regulatory policies. The governments may think, wrongly, that there is no longer any need to adopt pro-growth tax and regulatory relief to boost real output and create jobs. If the United States, Europe, and Japan are to have strong economies in 1999, their tax and spending authorities must not rest on the laurels of their monetary authorities and bank regulators. The idea that monetary policy and fiscal policy can substitute for one another in boosting the economy is a relic of the Keynesian era. The old Keynesian view was that all the supposedly stimulative economic policy tools available to government -- faster money creation, higher government hat Congress, spending, and tax cuts -- boost a n d the real output in the same way, he European by pumping up spending in the may iewv the economy. In that view, if one policy by the policy tool is being used to do t aese the job, the others can be left t apaese idle, or even moved in the i or opposite direction. For heir respective example, it is assumed to be y policies. O.K. to raise taxes so long as the resulting economic drag is offset by easier money or higher government spending. The policies can supposedly be mixed and matched to fine-tune total spending to raise output just to capacity, achieving full Europe, and employment without inflation. hae strong We now know that their tax and Keynesian demand only s must not rest economics is not valid. the monetary Monetary and fiscal policies work on different aspects of the economy, and work in different ways. The policies affect capacity by affecting the supply of labor and capital and by altering perceptions of risk. Fine tuning is impossible in a Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote econornic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www. ret.org

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