SYNOPSIS: Bush's tax cut supporters have woken up to the Bush deficits

There was an odd, almost whining tone to the speech Lawrence Lindsey, the White House's top economist, gave in Philadelphia last week. Mr. Lindsey said that he was "disturbed" to find that any doubts remain about the tax cut passed two months ago, that the cut is "an obvious success story." Clearly, Mr. Lindsey is feeling the heat: many people, even those who enthusiastically supported George W. Bush's campaign, are starting to have second thoughts about his tax cut.

The latest sign of second thoughts came on Friday, when the front page of USA Today carried a story about disgruntled military leaders who have realized that the tax cut precludes big budget increases. (What did they expect?) And there are more shocks to come. Wait until retirees realize that the tax cut also precludes any realistic plan to provide prescription drug coverage.

So Mr. Lindsey fell back on his usual argument: that the tax cut is needed to support the economy. He compared critics of the tax cut to Herbert Hoover, who raised taxes at the beginning of the Great Depression. But the very next day Mr. Lindsey's logic was contradicted by none other than the man who made the tax cut inevitable, Alan Greenspan.

By the "tax cut," I don't mean the rebate checks being sent out as you read this; neither does Mr. Lindsey. A rebate this year will do no harm, and may do some good. But although the Bush people are doing their best to wring political advantage out of the rebate, it wasn't their idea: their original plan offered almost no tax relief this year, and at first they scoffed at proposals for broad, short-term relief. Initial proposals for an immediate, across-the- board rebate came from Democrats; the administration finally went along, but tied the rebate to what it really wanted, big tax cuts for the rich in future years (and fudged the accounting to pretend that it could do all this without raiding Social Security).

So Mr. Lindsey wasn't defending the rebate; he was defending those future tax cuts. "A repeal of the scheduled tax cut would hit the economy at precisely the wrong time," he declared. In other words, we don't dare undo tax cuts that aren't supposed to happen until 2006 — or in the case of the estate tax, 2010 — for fear of depressing consumer spending right now. As soon as one puts his argument this way, of course, it becomes hard to take seriously. How many families base their current spending on news about tax changes that won't take place for five years?

On the other hand, there are some people who think very hard about the future budget picture, like bond traders — which brings us to Alan Greenspan. On Tuesday Mr. Greenspan was trying to explain to a Senate hearing why repeated interest- rate cuts have not yet turned the economy around. An important part of the explanation, as he noted, is that while the Fed has reduced short-term rates, long-term rates have stayed stubbornly high. Why?

An obvious answer is that bond traders, who not long ago expected the government to rapidly pay down its debt, now see the projected surplus dwindling rapidly because of the tax cut. So it's just supply and demand: estimates of the future supply of bonds are rising, so bond prices are falling — and that means higher long-term interest rates (including mortgage rates). When asked by Senator Charles Schumer whether this was a factor in the economy's sluggish response to Fed policy, Mr. Greenspan replied, "Oh yes, no question."

Mr. Greenspan did not retreat from his earlier endorsement of the tax cut. But in subsequent testimony he seemed again to concede that the effect of future tax cuts on today's economy is, on balance, negative. Where does that leave Mr. Lindsey?

For four out of five American families, according to the Joint Committee on Taxation, this year's rebate is most of what they will ever get from the Bush tax cut. Those future tax cuts that Mr. Lindsey wants to defend are overwhelmingly for the very, very affluent — and they will severely squeeze every other national priority. So why not reconsider them?

The threat of recession, it seems, is now the last refuge of . . . well, let's just say that we should not let Mr. Lindsey's scare tactics deter us from undoing a serious policy mistake.

Originally published in The New York Times, 7.29.01