Bush's New Economic Team Looks a Lot Like the Old

Old wine in new bottles. That’s what the shakeup of the administration’s economic team seems to come to. It is, after all, the president who will determine just what he puts to the Congress when he delivers his State of the Union message next month. The policy implications of the switch from Paul O’Neill to John Snow at Treasury, and from Larry Lindsey to Stephen Friedman at the National Economic Council, are likely to be nil. Besides, it is not at all clear that the economy needs stimulating.

Not clear that is, unless your father lost an election for seeming to be uninterested in economic matters, and for underestimating the time lag between an economic recovery and the emergence of that famous “feel-good factor” that is believed to swing close elections.

So we have activity in order to show concern. This, even though the economy grew at a 4 percent annual rate in the last quarter, and will probably grow steadily in 2003, after what some expect to be a bit of a slowdown in the last quarter of this year, a fear belied by the November spurt in retail sales. The housing market remains healthy-to-hot, with resales at their highest level in six months, median house prices up almost 10 percent as compared with last year, and indices of expected demand for new homes at their highest level in two years. Consumer confidence is on the rise; corporate profits in the third quarter beat last year’s figure by a healthy 12.2 percent (the second strongest yearly gain since 1997); and real incomes continue to grow.

But all of this good news is offset by still more good news: productivity gains continue to surprise on the upside. With productivity rising, increased output and sales do not require new hiring. Indeed, so strong is the improvement in productivity that many companies can meet increased demand with fewer workers. Hence the coincidence of good economic numbers and a rising unemployment rate.

The Bushmen want the unemployment rate to start down enough in advance of the 2004 elections to let the glow of “feel-good” suffuse voters’ psyches by the time they enter the voting booths. The more farsighted worry, too, that the so-called “imbalances” in the economy might catch up with them before 2004. The trade deficit is now around 5 percent of GDP, thought to be the point at which the dollar might weaken so rapidly that foreign investors will pull their money out of the country, forcing the Fed to raise interest rates to make dollar assets more attractive. Consumers are carrying a heavy, although not unbearable debt load, and might suddenly decide to rein in spending. And there might be a war, with economic consequences no one can with confidence predict.

So both in order to get the economy growing fast enough (at around 4 percent, probably) to bring down the unemployment rate, and to insure against the emergence of longer-term problems before 2004, the White House team felt the need to “do something.”

But there is very little it can do to steepen the growth path on which the economy is already set for 2003. The die is already cast. The Fed has lowered interest rates, and announced that it is content to sit back and wait for the effects of the most recent reductions to work their way through the economy. Taxes have already been cut so massively that, along with increased spending, the budget has moved from surplus into deficit, and more cuts might, as Fed chairman Alan Greenspan has warned and Friedman is alleged to believe, drive up long-term interest rates and further discourage business investment. Existing cuts can be brought forward and made permanent, but that hardly constitutes a change in policy, since it has long been the president’s intention to do just that.

Other measures that will find their way into the president’s growth program are of uncertain impact in the near term. The short-term effect of any tax cuts that put more money in consumers’ pockets, especially the pockets of upper-income consumers, will in part be diluted by increased savings. Short-term incentives to invest, such as the much-discussed increase in depreciation allowances in 2003, are said by 98 out of the 100 CEO-members of the Business Roundtable, once chaired by Snow, to be largely irrelevant to the bulk of their long-term investment plans. Reducing taxation of dividends, another proposal likely to be on the president’s list of tax changes, might in the long run encourage businesses to rely more on equity and less on tax-deductible debt to finance their expansion, but is unlikely to have much effect on the growth rate circa 2003-2004. And intervention in currency markets in pursuit of a “soft dollar” policy to stimulate exports would be dangerous at a time when the dollar is already weakening a bit, and a large flow of inbound investment is required to offset the current trade deficit.

Which brings us back to Snow and Friedman, both long-time exponents of balanced budgets. They will be hard pressed to explain to congressional Democrats and fiscally conservative Republicans just why they have become converts to tax cuts in a time of budget deficits. The new team, appointed over the vociferous protests of the supply-side wing of the Republican Party, will argue that Bush can please both supply-siders and the budget-balancers. The president intends to offset any tax cuts he can get now with reductions in spending later. That’s what the call to “reform” (read, partially privatize) Social Security will be all about, and what changes in Medicare and Medicaid will eventually be about—reducing the cost of the welfare state. It comes down to tax cuts and growth today, with reforms later to offset any shortfall after the tax cuts have worked their supply-side magic on the revenue side of the budget. If Bush can pull off that trifecta—lower taxes, more growth, and an eventually balanced budget—he just might be able to anoint his successor in 2008.

This article appeared in London’s Sunday Times on December 15, 2002, and is reprinted with permission.