WASHINGTON -- While economists and politicians argued last week over whether taxes should be cut to stimulate the economy, John Kenneth Galbraith of Harvard University advanced an Idea that the municipal bond market may find tempting -- at least, at first blush.
The former adviser to President Kennedy and other Democratic leaders told Congress that it would be "foolish, even mildly insane" to rush to cut taxes to spur the economy.
He told the House Budget Committee that tax and monetary policy are no longer adequate tools to overcome a recession, largely due to the cumulative effect of the thrift and banking crisis, mergers and leveraged buyouts, and the lack of consumer confidence.
The former ambassador to India described the multitude of tax cut proposals circulating within the administration and Congress as "an escape from reality" that would do little to spur the economy and more likely would end up in individuals' savings accounts or be used to pay off personal debt.
Instead, the economist suggested jump starting the economy by having the federal government substantially increase spending for highways, airports, schools, and other infrastructure, regardless of the immediate effect on the deficit, as well as making loans and grants to states to bolster public services.
Then, once the recession is over, Mr. Galbraith said the nation can go back to trying to balance the budget and reduce the deficit.
That's a templing idea, because a major increase in federal spending for infrastructure certainly should help reverse the sharp spending cutbacks by states and localities that have contributed significantly to the recession.
The infusion of federal money would be welcomed by the municipal bond market because it would allow states and localities to leverage the issuance of billions of dollars more in bonds.
But the proposal may be just as counterproductive for the municipal market and the economy as the quick-fix tax cuts that some in Congress are advocating. While such projects would help pump up the economy, the added spending would drive the deficit up to even greater record levels.
Since reducing the deficit has proven to be almost impossible during the last decade, it would be only a matter of time before the soaring deficit would rile the bond markets and send interest rates back to astronomical levels.
Mr. Galbraith may be correct when he says that using tax policy to fight the recession won't work, but throwing money at the slowdown when the federal government doesn't have any is not very promising either.
Rebuilding the nation's infrastructure should be at the top of the list of needed cures for the nation's long-term economic ills.
But driving up the deficit with massive new federal spending will only make it more difficult for states and localities to finance the projects that are needed to foster long-term economic growth.