BOTH President Bush and Congress are asking how much to cut your taxes. That's the wrong question to ask about America's economic distress. Policymakers are proposing election-year tax cuts for the middle class that will put enough in your pocket to take the family to McDonald's once every month or two. Meanwhile, the stagnation of average wages and the downward pressure on family income go unattended.
Cutting taxes is antigrowth because it puts the nation at grave risk of even higher deficits. Putting a few dollars into our hands now further threatens our competitiveness and our childrens' well-being as rising deficits reduce saving and investment for the future.
We - and here I include the leadership of business, government, workers, and the media - have done a very poor job of explaining to voters what large budget deficits are doing to our standard of living. Even a projected $400 billion deficit seems only an abstraction, unrelated to our lives and the real world, unrelated (unlike tax cuts) to better paychecks or profits.
But deficits are not an abstraction. They are dragging down our growth and living standards. One recent study estimates that the lower national saving rate in the 1980s, due in substantial part to deficits, has cut our productive capacity by 5 to 7 percent, and that loss could grow to 10 to 15 percent by the end of the decade. This growth shortfall will cost the average family $4,000 to $6,000 a year. At some point the American people will come to understand what budget policy has done to the American Dr eam.
The nation will be best served if Congress does not reduce taxes. Deficit reduction should remain our first economic priority, and significant spending reductions like the peace dividend should be used to reduce the deficit. The tax relief under discussion in Washington is inconsequential compared with the good jobs, good wages, good housing, good schools, and good highways we are sacrificing by feeding an ever-growing deficit.
Our first task is to go "back to basics" on economic growth. Rising living standards require higher productivity, which in turn requires more national saving and investment. These objectives demand deficit reduction, not tax cuts. Much of the current policy discussion, which focuses understandably on the recession, unemployment, and weak demand, simply ignores this fundamental long-term imperative.
Reducing the deficit does not ignore the very real distress that many Americans are experiencing. Just the opposite. Our longer-term economic distress is related principally to the accumulation of private and public debt, which would only be made worse by tax reductions.
TO raise American living standards, alleviate economic distress, and reduce poverty, we need the additional resources that can come only from economic growth. Yet our fiscal policy has been consistently antigrowth for years. The United States's national saving rate has collapsed from about 8 percent of national income in the three decades before 1980 to about 2 percent at present. (Japan's runs typically above 20 percent, and Germany's around 15 percent.) Our domestic investment is declining as foreign b orrowing becomes increasingly unavailable and unwise as an answer to the problem of inadequate saving.
What are the prospects that economic statesmanship will prevail? Not good. Pressures to break the 1990 budget agreement and allow increased spending are very strong. Whatever the merits of particular adjustments, such actions would leave the nation adrift, without fiscal moorings, in a political gale. The dangers of deficit expansion under the pressures of political competition to reduce taxes are grave. Memories of the 1981 tax "bidding war" seemed short-lived.
The president proposes to pay for his immediate tax cuts with a change to accrual accounting for certain financial entities and with tax changes that raise revenues now but involve large revenue losses in the future. Others argue for tax cuts that "pay for themselves" or are financed by unrealistic spending reductions.
We now have an unexpected opportunity to transfer enormous resources from defense to capital formation for growth and development. Yet Congress is now arguing only about whether the peace dividend should be frittered away on tax cuts or on more domestic spending. This would be a serious mistake. We should dedicate the peace dividend to deficit reduction. Tax cuts should be considered only when our children can afford them.