If George Bush has even the slightest hint of the usual late second term Presidential concern with personal popularity and legacy, he should take a cue from a throwaway paragraph at the end of an opinion piece in today’s Wall Street Journal, The Song of Bernanke. The Journal’s editorial argues, appropriately (even if 11 days after someone else said the same thing), that the Federal Reserve’s main priority is preserving the stability of the dollar and that “the Federal Reserve is no miracle worker” to ride to the rescue of financial markets or the economy as the housing market deflates.
So, if the pump needs priming and monetary policy isn’t the proper grease, what do they suggest? Well, the one fiscal stimulus best at creating noninflationary growth and one George Bush is awfully familiar with:
The Fed may well have to act if the economy does begin to stumble. But if that happens, the Fed isn’t the only or even the best policy lever. Fiscal policy is also available, which means the Bush Administration and Congress should be considering another tax cut. A tax cut could revive incentives for risk-taking among those feeling burned by the housing fallout. The federal deficit is heading down to 1% of GDP, and nothing would be worse for tax receipts than a recession.
We realize tax cutting is taboo in today’s Washington, but if the Presidential candidates aren’t considering a tax cut proposal, they should be.
Presidential candidates? Bush has well over a year left in office and a marginal rate cut could shave a bit off that 1% of GDP deficit, if the lessons of Kennedy, Reagan and…Bush…are any indication. If Bush wants to see the popularity he had in 2003 and 2004, he needs to head back to the well. In the process he might balance the budget and drive a nail in the coffin of the idea that high taxes are good policy.