Politically Motivated Pessimism on the Economy

A funny thing happened on the way to the American economic recovery. Those who have engineered it are coming under heavy fire for alleged policy errors. Federal Reserve Board chairman Alan Greenspan should be garnering kudos for his management of monetary policy, and President Bush should be hearing applause for his handling of fiscal policy. But the applause is being drowned out by the hisses.

Start with the recovery itself. Corporate profits are rising, bringing corporate net income close to historic highs and producing a rise in CEO confidence. Wholesale sales rose by 1.5 percent in June, the largest jump in fourteen months. Retail sales rose in July by a surprising 1.4 percent, as tax refunds and mortgage refinancings fueled spending on autos, building materials, and gardening equipment. The service sector grew for the fourth consecutive month. Even farmers are smiling, with a record corn crop and bountiful yields of soybeans and wheat predicted, along with higher prices for those and other commodities.

So after meeting at his ranch with his notably unimpressive White House economic team, the president pronounced himself satisfied that his tax cuts will soon generate growth so robust that the nation’s job-creation machine will spring to life. But Bush’s critics are having none of his optimism. Despite the fact that tax cuts have put money into consumers’ pockets just when the surge in long-term interest rates (rates on thirty-year mortgages rose from the lowest level in forty years, 5.21 percent in mid-June, to 6.34 percent early this month) has produced a 68 percent plunge in the mortgage refinancings that have kept consumers in the malls and the housing market, the president is under fire from Democrats who profess worry that the federal deficit, predicted to hit $455 billion this year and then continue to rise, will in the long run slow the economy and leave future generations with huge bills.

Bush dismisses such talk as partisan sniping. The deficits, he says, are due to the recession’s effect on tax receipts, expenditures connected with the war on terror, and Congress’ refusal to cut spending on less essential programs. Besides, he knows that deficits, GDP, productivity, corporate profits, and other indicators beloved of economists are of little interest to voters. They look almost exclusively at the job figures.

Which is why the president worries most about the fact that the economy has lost two million jobs since he moved into the White House, and why he dismisses criticism of the mounting deficit with the folksy comment that he is more concerned about creating jobs to enable families to put food on the table than with “economic theory and economic numbers”. That comment put me in mind of a conversation I had with one of his closest advisers. “If you want to be a successful politician in Texas,” he said, “it is best not to remind the voters of your Yale undergraduate degree and your Harvard MBA.”

Fed chairman Alan Greenspan, whose progressive cuts in short-term interest rates helped avert a major recession, is also under fire. Both Washington’s politicians and Wall Street’s money men are blaming the Fed for the recent, unprecedented fall in bond prices and, the flip side, rise in long-term interest rates.

Never mind that long-term rates have risen only to levels consistent both with history and the fact that they generally rise when an economic recovery is underway. The White House politicians know only one thing: that the president desperately needs a booming economy, and soon, if he is to coast to victory next November. So they are decidedly unhappy that rates have recently risen more rapidly than in recent history. After all, higher rates might discourage the business investment needed to make sure that the current, consumer-led economic recovery doesn’t peter out. Economists at Goldman Sachs are saying that “The increase in long-term interest rates is likely to substract about one percentage point from real GDP growth [and] . . . push growth back down to a below-trend pace in 2004.”

Not words to lighten the hearts of Bush’s reelection team. These pols still blame Greenspan for deciding in 1992 that the already-recovering economy didn’t need the added stimulus of lower interest rates. Bill Clinton and his “It’s the economy, stupid” campaign followed, forcing Bush pére to return to private life four years ahead of plan.

Equally unhappy are the Wall Street types who got badly burned last month when bond prices fell. They thought that the bond boom which had taken prices to unprecedented levels, and—again, the flip side, interest rates to record lows—would last forever. They guessed wrong, and have taken to print and to the air to blame it all on Alan Greenspan who, they say, led them to believe the Fed would support bond prices and then reversed course.

These critics seem to forget that it was Greenspan who helped pilot the economy through the foreign exchange crises in Asia and Russia, the failure of giant Long Term Capital, the obliteration of part of the financial community on September 11, the bursting of the dot.com bubble, and the war in Iraq. If you don’t think central bankers matter, and that Greenspan has used his limited weapons effectively, just look at Europe. The European Central Bank refused to follow Greenspan’s lead in lowering interest rates. Result: double-digit unemployment in recession-ridden Germany, 9.5 percent unemployment in France, and little sign of a recovery.

Presidents, and the fiscal policies they adopt, also matter. If you doubt that, imagine the state of the U.S. economy if a budget-balancing president were in office today. The real question is whether Bush will be able to stanch the flow of red ink when the economy is again booming. If he can, he and his monetary-policy partner will have a rightful claim to the applause that their critics now begrudge them.

An earlier version of this update appeared in The Sunday Times (London).