If and when the proposed tax cuts are fully phased in, they will not provide the US$1,000 a year boost to the income of 90 million households that the Bush administration implies they will. Instead, they will likely provide something like an additional US$250 a year to the incomes of typical households -- and much larger windfalls for households with annual incomes exceeding US$200,000. But these are the people least likely to take their tax cuts and spend them to boost aggregate demand.
Looking further out, US fiscal policy's long-run problems will become increasingly visible and urgent: there is not even a hint of a plan for reconciling the long-term costs of the social insurance state with American taxpayers' limited patience with high taxes. For most of the 1990s, the world economy did remarkably well, despite large-scale financial crises, the spread of AIDS in stagnating Africa, and the problems of transition economies. This was due to sound economic policy in the US (starting with the Bush-Mitchell-Foley tax increase of 1990), as well as some extraordinarily good luck in America.
There are no signs that wise economic policy in the US will continue in the first decade of the new century. If global prosperity is to return, America's economic luck will have to be even better than it was in the 1990s. The rest of the world economy would do well to play it safe and start making its own luck.
J. Bradford DeLong is professor of economics at the University of California at Berkeley and a former assistant US treasury secretary.
Copyright: Project Syndicate
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