Cornelson Lecturer Addresses Today's Big Economic Questions
March 30, 2001
by Matt Garfield '04
Just two months into office, President Bush has drawn both praise and criticism for his positions on a proposed income tax cut, the budget surplus, and Social Security reform.
One of the nation's leading economists, N. Gregory Mankiw, told a Davidson College audience recently that Bush is on the right track to solving each of these challenges.
"I am on balance supportive of what the president is trying to do," said the Harvard University professor. Appearing on March 27 as the annual Cornelson Distinguished Lecturer in Economics, Mankiw delivered a lecture entitled "Current Challenges Facing Economic Policymakers," to more than 100 people, including several dozen of the school's economics majors.
Mankiw said the economic challenges facing the United States today are as wide-ranging and divisive as at any point in recent history.
"This is a great time to be studying economics," he said.
Mankiw, an advisor to the Federal Reserve Bank of Boston and the Congressional Budget Office, has written two best-selling economics textbooks.
He specializes in economic growth, price adjustment, consumer behavior, and financial markets. His work has attracted grants from the National Science Foundation, the Social Science Research Council, and the National Bureau of Economic Research. He has also been awarded the Wolf Balleisen Memorial Prize in Economics from Princeton, and the Galbraith Teaching Prize.
Mankiw has served staff economist on the Council of Economic Advisors, and directs the monetary economics program at the National Bureau of Economic Research. He is associate editor for the Journal of Economic Perspectives and Review of Economics and Statistics, and has been a columnist for Fortune magazine.
Issue No. 1: The proposed income tax cut
Ten years ago, Mankiw said, the nation faced enormous budget deficits. But tax hikes by Presidents Bush and Clinton, combined with spending cuts in Congress, an "incredible boom in technology," and growth in productivity, have resulted in a budget surplus believed to be as high as $5.6 trillion. The fundamental issue dividing Republicans and Democrats today is what to do with the surplus‹cut taxes or increase spending on government programs?
Bush has proposed a controversial income tax cut of about $1.6 trillion.
One major criticism of Bush's plan is that it disproportionately benefits the wealthy, while providing only a modest break for the middle class.
Mankiw said that Bush believes that the dollar amount of the tax cut seems larger for the rich, but in reality the percentage tax cut is equal across tax brackets. "Is that a giveaway to the rich?" he asked. "It depends on how you look at the numbers."
Issue No. 2: The budget surplus
Critics say a huge tax cut will jeopardize the budget surplus if the economy falters, while supporters say the money belongs to the American people and should be given to them regardless of economic conditions.
The stock market has undergone several slow-downs in recent months, leading some economists to speculate that a recession is imminent. "I give it a 50/50 chance," said Mankiw. "We won't know for sure until the data comes in."
In his view, however, a tax cut shouldn't be based on the business cycle, but rather political philosophy of the proper role of government.
"The fact that the economy is slowing is one argument for the tax cut," he said. "But it's not the fundamental one."
Issue No. 3: Social Security reform
"Social Security is probably the single biggest issue that President Bush will face," said Mankiw. "The problem will not become acute for another 20 years, but presumably we want to fix it before it becomes acute."
President Clinton was unable to craft successful Social Security reform during his eight years in office, and that's in part why it was such a hot issue during the 2000 presidential campaign. "There's lots of discussion about the so-called 'lockbox," Mankiw said, referring to a term made famous by Vice President Al Gore during the presidential debates.
"But notice you never saw a picture of the 'lockbox.' It's a brilliant metaphor, but there's no sense that there is anything real about it."
He continued, "To put it another way, who will hold the key to the lockbox? It's Congress, which is what you're trying to keep the money away from in the first place."
Concerning Bush's proposal to allow individuals to invest Social Security earnings in the stock market, Mankiw spoke of a paradox: He recalled that the Social Security system was created in the first place because the government feared individuals would not save money they would need after retirement.
"If we don't trust people to save their money," he asked, "Why should we allow them to invest it? The real question is, 'How much do you trust Congress versus how much you trust individuals?'"
Davidson's Cornelson Distinguished Lecture is one of several initiatives funded through the Cornelson Endowment which strengthens the "senior session" for economics majors at Davidson. The endowment was created by Mr. and Mrs. George Henry Cornelson, IV, and their four children, to recognizes and honor six members of their family, spanning four generations, who have studied at Davidson‹Charles Arthur Cornelson '04, George Henry Cornelson, II '92, George Henry Cornelson, III '22, George Henry Cornelson, IV, George Henry Cornelson, V, '80, and Elizabeth Cornelson Robinson '87.
Davidson is a highly selective independent liberal arts college for 1,600 students. Since its establishment in 1837, the college has graduated 23 Rhodes Scholars and is consistently ranked among the top liberal arts colleges in the country by U.S. News and World Report magazine. Davidson recently launched "Let Learning Be Cherished," a $250 million campaign in support of student financial assistance, academic resources, and community life.