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Spend more, tax less to fend off recession

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WASHINGTON — In the fog of economic war, one incontrovertible truth is clear: The budget projections of Congress and the White House will continue to be horrendously out of whack.

A decade ago, huge deficits were predicted "as far as the eye could see" but never happened. A few months ago, the same savants saw huge surpluses far into the baby boomers' geezerhood; now their surplus prediction is in free fall. Lesson in humility: The economic eye cannot see that far.

Here is a bedrock principle about the role of government in the economy: When prosperity booms, the government should apply a brake by running a surplus. Conversely, when recession looms, the government should press the accelerator by running a deficit. That subtraction or addition to aggregate demand is called "raising Keynes."

Thus, when happy days are here, government should surely slow the growth of spending; when harder times are on the way, the feds should spend more and tax less.

Will this enable Washington to tootle a fine tune of steady, full-employment growth without inflation? No; the feds control only a fifth of the nation's product and can only lean against the changing wind.

Here we are today with unemployment rising smartly and consumer and investor confidence falling intelligently. By those measures, it's safe to say a downturn is upon us — signaling the moment for government to spend more and tax less.

Why aren't we doing that? Why isn't the government getting out of the restraining posture of surplus and getting into the stimulating business of deficit?

The reason that good Keynesian sense is not prevailing is that Bill Clinton, eager to find a way to avoid tax reduction, spooked the nation with his phony notion of a "lockbox" on revenues coming in from the payroll tax.

It's phony because no such vault exists; no fund containing cash or gold is set aside for future retirees. The notion of an uncrackable safe containing untouchable security is a fraud. The only thing in the "lockbox" is government paper, which is a promise to pay from the Treasury in the future.

By striking fear into oldsters with his demagogic "save Social Security" slogan, he joined conservatives in making "deficit" a dirty word. But only in boom times is "deficit" a dirty word; when air is hissing out of the balloon and a deficit becomes temporarily desirable, "surplus" becomes the dirty word.

The Bush administration and Republicans in Congress were snookered by the "lockbox" oratory and now are stuck with a foolish promise. Democrats in Congress would rather see Bush wriggle than let him off that hook; obsessed with the success of their lockbox ploy, they are hinting that the way to preserve the counterproductive surplus is to repeal the Bush tax reduction. The Senate leader, Tom Daschle, forgets that the last president to answer a downturn with a tax increase was Herbert Hoover.

The only way out the new president left himself was "in case of war or recession." The time has come for using the second part of that out. My plan: Increase federal spending on education and missile defense; as the slump deepens, fold in a prescription drug benefit for seniors. At the same time, double the summertime tax cut, reducing taxes on average families again in time for Christmas purchasing, to which no liberal could object; add in a capital gains cut to move the markets and bestir optimism.

This mild fiscal stimulus may not turn us around, but it surely wouldn't hurt. It beats watching Democrats drag their feet, pretending the surplus goes into some vault or mattress, and silently hoping for hard times so they can win the House next year.

Break out of the depressive lockbox mentality. In economic buoyancy lies the only social security.

New York Times News Service