Today's protests about tax cuts being too large because the debt paydown is threatened are the result of a dangerous, mistaken idea that somehow debt paydown caused the prosperity of the 1990s. In truth, the prosperity of the 1990s caused the debt paydown. Tax rate reductions are an even better investment in 2001 than they were in 1962. In 2001 the negative pressures on the U.S. economy, not to mention the global economy, are serious enough to justify far more aggressive tax rate reductions. Some movement in that direction will presumably occur if the sharp slowdown in the U.S. economy over the coming months turns fiscal policy debate from the current dangerous quarrel about whether tax cuts are too large into a healthy contest between Republicans and Democrats to determine who can cut taxes by the larger amount.
Monetary policy is also disconcertingly complacent in view of the dangers facing the U.S. economy.
Although reductions in interest rates cannot eliminate the recession, they can cushion it. A stimulative 3 to 3.5 percent is needed. Both monetary and fiscal policy will have to be sharply reoriented toward stimulation of the economy in coming months. A failure to do so would only reinforce the uncanny tendency toward depression after equity market bubbles have burst.