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A Wall Street economist told me last week that the U.S. economy was already growing and would continue to do so over the next year or so. Despite his optimistic forecast, however, he insisted that a fiscal-stimulus tax cut was still needed because it would provide some much needed "insurance."

Given the extraordinary vagaries of the U.S. economy over the past few years, a quick return to persistent growth probably should not be left to chance, so some type of fiscal insurance policy is worth considering. The question, though, is whether it makes sense for the federal government to take out the budget equivalent of whole life insurance when a one-year term policy would be more appropriate to what needs to be insured - and would be far less expensive.

Why should Washington continue to pay for insurance year after year, with what is widely expected to be a permanent tax cut, when the only thing that really needs to be insured is the next 12 months? Wouldn't it make more sense to have a large one-year tax cut now that could be renewed a year later if it is still needed?

Congress and the Bush administration are taking the whole life route. The economic insurance embodied in the tax cut the House and Senate have now passed is roughly the equivalent of a corporation buying a whole life policy for its CEO even though she or he is only expected to be in the job for another year. The company will be obligated to continue to pay the annual premium under the whole life policy long after it is getting any benefit from doing so. In fact, continuing to pay the premiums after the CEO leaves will harm the company's bottom line.

The economist then told me that a tax cut was also called for because the larger deficit that will result from it is the correct fiscal policy for the present situation. If this tax cut also causes deficits that are inappropriate in the future, he said, the policy causing those deficits can be changed at that time to match the then-current need.

This, too, is a plausible position to take. After all, the federal government has one-year budgets, and so in theory existing fiscal policy can always be changed.

But, in response to my question, the economist also thought that it was unlikely that the White House and Congress would actually increase taxes or cut spending to reduce the future deficits that would result from the insurance policy being put in place this year. This is roughly the equivalent of what would happen if you wanted to buy term life insurance, but the only thing anyone would sell to you is a whole life policy. You know it's the wrong thing to do, but your only choice is to accept what is presented or go with no insurance at all.

In some cases no insurance might be the way to go. If, as my economist friend is so certain, the economy is going to grow anyway, it makes no sense to do the federal budget equivalent of being stuck with a whole life permanent tax cut policy because that is the only thing that is being sold. Working harder to find a short-term tax cut that can be renewed or buying no tax cut insurance at all would be the better way to go. This is especially the case because of the long-term costs of the whole life tax cut that Congress and the White House are so insistent on passing.

Of course, it is important to remember that economic growth is only one of the things that Congress and the White House are trying to insure with this tax cut. They also see it as personal liability insurance for the 2004 election.

Question Of The Week

Last Week's Question. Last week's very technical question about the difference between "advanced appropriations" and "advanced funding" received a surprisingly large number of correct responses. The winner of the very sexy and always in demand "I Won A 2003 Budget Battle" mouse pad is Ron Sissel, a performance measure auditor for the New Mexico Legislative Finance Committee in Albuquerque, who was selected at random from all those who answered the question correctly.

For the record and in overly simple terms, an advanced appropriation is a commitment made in this year's appropriation to spend money next year. Advanced funding is when money from next fiscal year is used to pay for programs in the current fiscal year.

This Week's Question. Has it occurred to you yet that it is almost Memorial Day and you still don't have the hottest mouse pad available anywhere? The "I Won A 2003 Budget Battle" mouse pad could be yours if your answer is selected as the winner for this week's contest. The question: The running of the Preakness this past weekend means that the last leg of racing's Triple Crown - the Belmont Stakes - is less than three weeks away. What would be the most appropriate budget-related name for a horse in this race?

E-mail your response by 5 p.m. PDT on Saturday, May 24, 2003. You must include your mailing address so the "I Won A 2003 Budget Battle" mouse pad can be sent if you win. If there is more than one correct response, the winner will be selected at random from those with similar answers. (Note to government employees: Because of security procedures at most departments and agencies, a home rather than office address will be the best way to get the mouse pad to you.)

COMMENTS

• See a transcript of Alan Greenspan's comments before a Senate committee this morning (May 21). He strongly supports the elimination of taxes on capital, which either the House or Senate proposed bills would tend to do. Both proposed bills also contain some short-term stimulus provisions. Don Champagne Posted May 21, 2003 4:16 PM