March 24, 2003
by Irwin Stelzer
Nowhere is that history more firmly etched in the minds of men than at George W. Bush’s White House, which is why the president’s team is now waging a serious war on the domestic front to put some pep into the economy. Private forecasts by White House economists see the unemployment rate climbing to 6.8 percent by early next year, from its current level of 5.8 percent. That means that some 1.3 million workers will be added to the seven million already thrown out of work by layoffs in the airline, financial services, high tech and other industries.
But the president’s political managers are telling their economist counterparts that the electorate won’t evict Bush from the White House so long as the unemployment rate is coming down by the time voters have to cast their ballots in November 2004. They therefore are working to push the president’s stimulus package through a decidedly skeptical senate.
The Bush team has made the following private assessment of the economic outlook. Consumer spending has kept the economy from slipping into recession, while businessmen remain on the sidelines, refusing to invest in new plant and equipment. Bush’s conversations with leading businessmen turned up the startling fact that the business community doesn’t think that tax relief for businesses will help to get the economy growing fast enough to bring down the jobless rate. Businessmen are telling the White House that so long as there is substantial unused capacity, they have no interest in putting more money into new equipment. What they want to see is an acceleration of consumer demand sufficient to sop up excess capacity: then, and only then, will they dust off expansion plans.
But consumers may be at the end of their tethers. Bad weather and then-impending hostilities make it difficult to decide whether the 1.6 percent drop in consumer spending in February was merely a temporary response to passing events, or the result of more fundamental factors such as the high level of consumer debt, but the White House is not prepared to gamble that mild Spring weather and a speedy and successful conclusion of the war will get consumers back into the shops and auto showrooms, and keep them buying ever-bigger houses. So it wants to cut taxes to put more money into consumers’ pockets.
Late last week the House approved Bush’s tax cuts, but the deficit hawks in the senate are unhappy. They say that the proposed tax cuts will create deficits as far ahead as the eye can see, and that such deficits will drive up long-term interest rates and stifle investment and economic growth. Not for them the supply-side argument that deficits create growth, which in turn increases the flow of tax revenues into the Treasury’s coffers, thereby eliminating the deficits that were initially necessary to prime the economic pump. Nor are they buying into the idea that the proposed deficits, estimated by Goldman Sachs to run initially at something like $375 billion, are easily sustainable by America’s $11 trillion economy.
Key senators in the president’s own party also say that it would be imprudent to cut taxes until we can estimate the cost of the war, which in its early stages has prompted the administration to ask congress for $90 billion in supplemental funds. Worse still, no one can estimate the cost of rebuilding Iraq to turn it into the prosperous, functioning democracy that the president is hoping will serve as a model for other Middle East countries. Surely, it would be unwise, they say, to assume that France and some other countries who oppose the American and British-led worldwide coalition of more than 35 nations, will pick up any part of the cost of the nation-building effort.
So the president is unlikely to get the full tax cut he seeks. But he will most likely get something. Key so-called “centrist” Republican and Democratic senators say they will support a cut equal to about half the 10-year $750 billion reduction the president seeks. If the centrists’ target cut of $350 billion does attract majority support, the president’s $400 billion plan to end so-called double taxation of dividends is a goner. That provision upsets not only the deficit hawks but those who worry that its benefits will be concentrated on “the rich”, a group that wins no sympathy from Democrats even though it includes millions of pensioners, and the people who now pay most of the taxes collected by the government.
All of this distresses the president’s team. The more conservative members believe that the only way to control government spending on welfare and other pet congressional programs that include such items as subsidizing off-shore horse betting—“discretionary spending” in the jargon of budget-makers—is to adopt Ronald Reagan’s strategy: cut taxes, and run deficits so large that new spending programs simply cannot be financed.
Other presidential advisers think the centrists’ half-a-loaf won’t do. They have told the president that he must get at least 70 percent of the tax reduction he wants in order to add about 0.5 percent to the GDP growth rate, which just might bring it to a job-creating level in time for the 2004 elections. Less than that won’t do.
Nor will a quick and triumphant end to the war. Geopolitical uncertainties will remain. So will high levels of consumer and corporate debt, and volatile share prices. But continued low interest rates and the house-building boom they induce, a substantial tax cut, plus a level of confidence sufficient to encourage consumers to continue refinancing their mortgages, can keep consumers spending until businessmen decide that the time has come to resume investing in the futures of their companies.This article appeared in London’s Sunday Times on March 23, 2003, 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.
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