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The Return of Voo-Doo Economics

This economic stuff is a bit confusing. President Bush says his $674 billion stimulus package–which boils down to huge tax cuts that mainly benefit the rich–will spur economic growth. In California, the nation’s most populous state, Democratic Governor Gray Davis says he needs to raise taxes to close a staggering $35 billion deficit in addition to massive cuts to services. Republicans in Congress support Bush’s tax cuts saying it doesn’t just benefit the wealthy, while Republicans in California oppose Davis’ move to increase taxes for the state’s wealthiest citizens by as much as two percent to stimulate the economy in California. Bush says his plan will create jobs. Davis’ plan will likely result in job cuts. Who’s right? Or is this just politics as usual?

Has anyone seen or heard from Federal Reserve Chairman Alan Greenspan? Surely, Greenspan, the economy’s psychic, can settle this nonsense by peeking into his crystal ball and tell us what the future holds under Bush’s plan and throw in his two cents about Davis’ package. California is, after all, the largest contributor to the nation’s economy. But it seems that Greenspan is in a pickle. On the one hand, if he comes out in support of Bush’s tax plan Democrats in the Senate said they would call for his resignation. On the other hand, if he opposes it he’ll face the wrath of the Bush administration. So now Greenspan is in hiding (probably tidying up his resume).

It’s easy to distrust Bush. Just look at his track record. But it’s even easier to distrust Davis, who single-handedly turned a $12 billion surplus into a $35 billion deficit, which is larger than the entire budget of most U.S. states. Davis said the Internet bust in Silicon Valley and a downturn in the stock market, both of which contributed heavily to state coffers, were largely to blame. But since Davis became governor four years ago, government spending nearly doubled and his mishandling of the state’s energy crisis in 2000 and 2001 cost the state tens of billions of dollars.

The one thing these two diametrically opposed economic plans have in common, judging by news reports, is that they are both largely opposed by millions of citizens and both are mired in politics. Yet President Bush and Governor Davis had the same message.

“We have one overriding task before us. We must come together to create new jobs and get our economy back on track. This task will not be easy. But it is essential if we’re going to continue moving forward,” Davis said last week.

“We’ve got some obstacles to overcome And one of those obstacles is to make sure people can find work, make sure this economy is strong and vibrant and hopeful, that the future is optimistic for every single citizen,” Bush said last week.

So who’s got the better stimulus package?

Robert Reich, the former labor secretary under President Clinton, explained Bush’s economic plan in the simplest of terms in a column last week: “It’s not a plan for ‘growth and jobs’; it’s a plan for rewarding the rich when what the economy needs is more spending by people of modest means. And it further concentrates wealth and power at a time when wealth and power are already in fewer and fewer hands.”

In California, the exact opposite would happen under Davis’ plan. The governor’s announcement of tax increases and massive cuts to help erase red-ink sets the stage for a political battle. The tax proposals have support from Democrats, who want more money to protect programs, while Republicans call higher taxes damaging to the economy and vow to block any budget that includes them.

Nearly every state in the nation is facing a fiscal crises that forces cuts in education, law enforcement and health care. How does this impact Bush’s economic plan, which provides a paltry $3.6 billion to help out the states?

“It is setting up an unwitting collision over fiscal policy between Washington and the states that will help determine the future of the economy and the fortunes of Main Street,” according to the Christian Science Monitor.

By accelerating the income-tax cut and ending the dividend tax, Bush hopes Americans will spend more and invest more. The stock market fueled the surpluses of the 1990s, as investors cashed in and paid huge capital-gains taxes. Now, their disappearance is the single greatest factor in the state budget crises and could lead to an economic disaster, the Monitor reported

To many, though, the Bush plan is full of dangers. For one, they say the centerpiece of the proposal – the repeal of the dividend tax – could work against states trying to dig out from deep deficits. Thirty-seven states depend on federal data to collect roughly $4 billion in dividend taxes. Without Washington’s help, states would have to drop the tax or come up with a complicated formula of their own., the Monitor reported.

“Every dollar you give to states is a dollar that will go into the economy,” says Iris Lav of the Center on Budget Policy and Priorities in Washington, in an interview with the paper. “It is the most direct stimulus.” Instead, she adds, the states and the federal government continue to work largely at cross-purposes: “It very likely could be close to a wash.”

Sounds like politics as usual.

JASON LEOPOLD can be reached at: jasonleopold@hotmail.com

 

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JASON LEOPOLD is the former Los Angeles bureau chief of Dow Jones Newswires where he spent two years covering the energy crisis and the Enron bankruptcy. He just finished writing a book about the crisis, due out in December through Rowman & Littlefield. He can be reached at: jasonleopold@hotmail.com

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