Almost Astrology: The Democratic view of the economy.

In his indispensable book The Making of Modern Economics, Mark Skousen reports that in the late 19th century some economists actually theorized that "the configuration of the stars and planets" was a key cause of business crises. This economic astrology is only slightly less bizarre than what today's leadership of the national Democratic party believes about the current economic recession.

On January 4, Senate majority leader Tom Daschle made a major economic speech in which he set forth for Democrats an alternative vision to what he ridicules as the GOP's "unchanging, unyielding solution that they offer for every problem: tax cuts that go disproportionately to the most affluent." The speech neatly summarized what the opinion class of the Left has been saying for years now: Tax cuts are the root of all evil.

Unfortunately, Daschle's lecture contains precious little economic wisdom. His strategy is to blame the recession, the surge in unemployment, and the reemergence of budget deficits on President Bush's tax cuts passed back in May. Never mind that the stock-market slide and broader slowdown began at least six months before Bush became president, and almost a year before his tax cut was enacted. (The public understands this: Recent polls show that Americans are much more likely to blame Bill Clinton for the recession.)

Daschle's economic case against tax cuts goes like this: Tax cuts simply give money to rich people and corporations who don't need it; these tax cuts lead to higher budget deficits; higher budget deficits lead to higher interest rates; higher interest rates hurt the economy. A much better way to reinvigorate the economy, according to Daschle, would be to scuttle all talk of tax-rate reductions in 2002 (some in his party want last year's Bush tax cut cancelled too) and instead increase government spending on infrastructure, education, training, and welfare programs.

On one point, Daschle is right: The Bush tax cut has not helped the economy one iota. It has not put a single unemployed American back to work. But how could it? Nobody's taxes have been cut yet. Bush made a fatal concession to Democrats last spring in agreeing to defer almost all of the tax-rate reductions to 2004 and thereafter. How can tax cuts scheduled for 2005 rescue the economy now? In fact, the only tax "cut" so far was last August's harebrained tax-rebate plan. And guess whose idea that was? Tom Daschle's. The White House economic team was quick to adopt it, making fatuous arguments that rebates would help the economy; just as quickly, the congressional GOP realized the political appeal of having the government write $300 checks to voters.

But the tax rebate was essentially an anti-supply-side tax plan that contained no incentives to increase output. In supply-side economics, the purpose of reducing tax rates is not to put more money into the hands of consumers to spend (though it's undoubtedly true that they can spend it more efficiently than Daschle or Denny Hastert can), but rather to increase production and wealth-by reducing the tax penalty against saving, working, hiring, investing, and taking risks. And so far, neither party has pushed for this kind of stimulus to help us out of the recession.

The intellectual underpinning of Daschle's assault against tax cuts is the theory that lower tax rates mean higher long-term interest rates and lower long-term investment. There are two major flaws in this theory. First, former Treasury economist Gary Robbins has shown that high marginal tax rates deter investment more than high interest rates do; this means that we should cut marginal tax rates, even if we have to borrow to do so. Second, there is no actual evidence to support the claim that tax cuts cause higher interest rates. In the 1980s, Ronald Reagan put through a major tax cut; mortgage interest rates fell from their 1980 Carter-era peak of 17 percent to about 8 percent when Reagan left office. In 1993, promoters of the Clinton tax hike argued that it would lower interest rates-but in the 18 months after the tax hike, interest rates rose. In recent months, interest rates have fallen, even as the budget deficit has risen.

This is not to deny that federal deficit spending crowds out private investment; it almost certainly does. But the crowding-out effect is not from the borrowing to pay for the spending, it is from the federal spending itself-the pulling of real resources out of the private economy and allocating them to political pork.

And that's precisely what Sen. Daschle wants to do. Rather than cut taxes to juice the economy, the Democrats argue for, in essence, the Japan-Argentina economic-recovery model: a traditional Keynesian pump- priming scheme of flooding the nation with tens of billions of dollars on new and expanded federal programs. But the logic here is contorted: If tax cuts are unwise because they unbalance the budget and risk boosting interest rates, certainly this must be equally true of increased federal spending. In his Jan. 4 speech, Daschle invoked the principle of "fiscal responsibility" repeatedly, and with Clintonian sincerity; he might even have pulled off the deception had it not been for the speech's proposed solutions, which amount to a naked endorsement of big government.

Indeed, ever since Daschle became majority leader last May, federal spending has been rising steeply: In 2001, it posted its largest percentage increase since the late 1970s. In terms of sparking up the economy, this $150 billion government shopping spree has been a total dud; the same strategy that turned Japan, once a proud and prosperous island, into a gigantic, publicly funded slab of concrete, is now failing here.

In sum, the Daschle anti-recession medication is nothing new at all: expand the government and fiercely oppose all tax cuts.

But where are the Republicans' new ideas? Even President Bush's own version of a fiscal-stimulus plan is economically impotent: It does not cut the capital-gains tax; it does not reduce the highest and most punitive income-tax rates; it does not eliminate the corporate alternative tax. Furthermore, almost half the cost of the stimulus plan would be consumed by programs that will reduce jobs and growth: another crackpot tax-rebate scheme (this time targeted to workers who don't pay income tax); expanded unemployment insurance (which simply pays people to stay unemployed longer); and more government-subsidized health care. The only income-tax-rate reduction in the president's plan would slice the 27 percent rate down to 25 percent. If this is the GOP's anti- recession program, then the Republicans are only slightly less confused about how to create jobs and wealth than the Democrats are.

The White House should start over: abandon last year's aborted fiscal- stimulus charade and push for an aggressive economic plan to get back on the track of the 4 percent annual growth rate of the late 1990s. Want jobs and reinvestment to soar in 2002? Suspend the capital-gains tax for one year, as Arthur Laffer has proposed. Rather than suspend the Bush tax cut from last June, as the Democrats have suggested, accelerate all the tax cuts to January 1, 2002. Finally, don't try to mend the complicated corporate alternative tax. End it. But don't expect any cooperation from Tom Daschle.