Two Politicians, Two Gambles
April 22, 2002
by Irwin Stelzer
While Gordon Brown, Britain’s chancellor of the exchequer (the equivalent of the U.S. Treasury Secretary), was busily snatching a larger and larger portion of his nation’s output for the government by soaking the rich and not-so-rich, U.S. president George W. Bush was campaigning hard to round up support for tax cuts that would benefit high earners. In part this represents a difference in attitudes about the effect of taxation on the economy’s performance. Brown sees high earners as a potential source of tax revenue, and has no worry that higher taxes will make them leave work earlier and vacation longer. Bush, on the other hand, sees high earners as the engines of economic growth, and thinks that lowering their tax rates will give them an incentive to work more and dare more, and eventually produce more revenues for the treasury.
In part, too, the difference in the policies being pursued by Britain’s chancellor and America’s president reflects a fundamental difference in attitudes towards the role of government. The chancellor sees the state as an instrument that can heal the sick, shelter the old and the young, and feed the poor, while the president wants to shrink the role of government and encourage the private sector to do many of the things that state-run welfare systems do not do terribly well.
But governments don’t shrink when there is a war on. Just as Brown is waging an expensive war on poverty, Bush is waging an expensive war on terror. He is urging Congress to add $27 billion to the $40 billion it has already provided for operations in Afghanistan, aid to New York City, airport security, anthrax cleanup, and a host of other costly items on the anti-terror shopping list.
Americans don’t see most of this money going out. But they do see the increasingly expensive fiasco at the nation’s airports, now the butt of national cartoons and late-night comics. After promising to veto Congress’s plan to federalize the workforce at airports, Bush caved in and signed a bill transferring 30,000 workers from the private to the public sector. Oops. It turns out that new security measures require twice that many wand wielders, prodders, and trainer checkers, at a cost five times the originally estimated $1.3 billion.
Which puts Bush in somewhat the same position as Brown. If the extra cash the chancellor is throwing at the bureaucracy-bound, monopoly National Health Service results in a better service, he will have won his bet, and be headed for No.10 Downing Street. If more money means the same old queues, Brown’s political career may well be over. Bush is similarly exposed. If all of the tax money being spent on the airport security staff that now works for the government only means the same old queues, and hard times for innocent travelers while bomb- and weapon-toting evildoers walk unimpeded through checkpoints, voters are likely to wonder if the president is handling the other aspects of the war on terror as well as the Pentagon’s spindoctors would have them believe.
Such doubts are already surfacing, and not only because a new videotape seems to show that Osama bin Laden is alive and ranting. By sending U.S. secretary of state Colin Powell to negotiate with Yasser Arafat, the director of the world’s longest-running terror operation, Bush has surrendered the high moral ground on which he stood when articulating a clear message—terror is evil, terrorists are murderers, and we will get them.
The president’s men are aware that the fraying of his foreign policy credentials makes it even more important that Bush’s reputation for economic management be unassailable in the congressional election campaign in November, and in the presidential campaign that will start soon after. So they were delighted when a series of economic data pointed to a continued upswing.
First-quarter growth has been the strongest in two years, and consumers continue to spend, prompting economists at Business Week to conclude, “Healthy gains should be sustained into the second half.” Industrial production rose in March for the third consecutive month, and at its fastest rate in nearly two years. The auto industry, although still suffering from weak earnings (General Motors) and losses (Ford), and likely to continue belt-tightening and layoffs, raised its 2002 vehicle sales forecast by one million, to 16.5 million vehicles. Chipmaker Texas Instruments says that sales are picking up and that it has “turned the corner towards growth.” The rate of increase in productivity in the first quarter “appears to have been another barn-burner, say 5 percent,” say consultants International Strategy & Investment, predicting “three more quarters of solid growth.”
Bush hopes so, but is less certain than the optimists, or at least so he says in what may be an attempt to manage expectations down, and to build up support for making his tax cuts permanent. More important, Federal Reserve Board chairman Alan Greenspan joins the president in remaining unwilling to predict that everything is coming up roses. Consumers, already spending freely, can’t be expected to do more to feed a recovery, especially because “higher energy costs are again sapping the purchasing power of households,” Greenspan told Congress’s Joint Economic Committee last week. Indeed, “we have already observed significant spending restraint” among high-income households, which suffered large declines in wealth as share prices fell. All in all, said Greenspan, despite rising productivity and an improving job market, “the strength of the economic expansion that is underway remains to be clarified”—central-bank speak for “things are going well, but there is enough uncertainty to make it unwise to raise interest rates just yet.”
Just like Brown, Bush needs the tax revenues that a growing economy generates. If Brown’s tax increases do stifle growth, the chancellor will run deficits so large as to turn his “golden rules” of fiscal policy to lead, and leave his career in tatters. And if Bush’s tax cuts turn out to exacerbate America’s budget deficits, the president may find himself campaigning for re-election just when he has to cut very popular domestic programs in order to fund the war on terror, in which case he may have more time to spend on his beloved Texas ranch than he now contemplates. Two politicians, two gambles.
This article originally appeared in London’s Sunday Times and is reprinted with permission.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.