Bush Economic Team Debate Their Next Move

There is a row going on in the White House. Well, more a discussion than a row, as the one thing this president values as much as loyalty and punctuality is civility. On one side of the debate are the stimulators, those who think the economy needs a bit of a shot in the arm, as insurance against a double dip, if nothing else. Opposed are the reformers, those who think the economy is doing just fine, thank you, and that now is the time to keep a wary eye on the mounting deficit, and reform the tax structure, rather than engineer a fiscal stimulus.

Both sides agree on thing: the United States can’t look to its trading partners to add some zip to the world economy. Japan’s banks are still hesitating to write down bad loans and add to their capital, so that they can resume lending. Germany is in such a funk that the words “Weimar Republic” are being heard in the land, and Chancellor Schroeder is said to be considering returning to private life. Italy’s economy is mired in a no-growth mode, with unfunded pensions threatening the state and several businesses with major problems. In France, at this writing, the unions have closed the airports and striking haulers are blockading the roads.

As for Britain, U.S. Treasury secretary Paul O’Neill journeyed to Manchester to pronounce its economy in relatively good shape, but that boost for the Blair-Brown team is more a payback for the prime minister’s support of America’s Iraq policy than a studied economic judgment. In fact, we are about to see whether the fiscal stimulus created by new borrowing to fund the chancellor’s massive spending program can offset the stultifying effect of his tax rises and the web of new regulations that Westminster and Brussels have spun to ensnare British businesses.

So once again America has to play the role of the world economic locomotive. O’Neill and his Treasury team think it is positioned to do just that. The economy grew at the quite satisfactory annual rate of 4 percent in the third quarter, and almost all signs point upward. Jobless claims are at their lowest level in almost two years, suggesting 2003 growth at a rate of 3.7 percent. Real incomes are rising, productivity continues to advance smartly, consumer confidence is recovering as we enter the holiday shopping season, and personal consumption expenditures rose briskly in October. Even the much-troubled manufacturing sector is showing signs of life, with new orders for durable goods up 2.8 percent in October, and indexes of activity from Philadelphia to Chicago turning up.

As Treasury economists see things, that means that no stimulus is required. They are urging the president to use his political capital and majorities in both houses of Congress to push through a list of reforms to the tax structure, reforms that they feel will contribute to the long-term health of the economy, not least among them the double taxation of dividends.

White House economists see a different picture. They believe that the recent recovery in share prices is a temporary uptick before a further drop, and that it would be prudent to anticipate some shocks to the system, such as a collapse of Ford due to its underfunded pension plan and other problems, and possible tremors in financial markets when—not if—Sandy Weill is forced out at Citigroup as a consequence of his dealings with disgraced stock picker Jack Grubman. And, oh yes, a war.

They also fear that the third quarter growth figure is misleading in two respects. First, some of the growth was due to the production of goods that ended up in warehouses and on shop shelves, unsold. Second, most of the growth occurred in July, with performance in August and September notably weaker. Not that they are predicting a double dip. Rather, they think that a tax cut now would ensure that the economy enters the new year with more momentum than they feel it will do, left to its own devices.

So the White House economics team is pushing for such things as the immediate write-off of some capital investments to be made in 2003. It is backed by the political types, led by Karl Rove, his prestige at a peak after crafting the strategy that had the president barnstorming the country in a successful effort to increase his party’s margin in the House, and regain control of the Senate. The politicians are haunted by memories of another president Bush, wildly popular after pushing Saddam out of Kuwait, but seen by voters as presiding over a recession about which he was doing little. Never mind that the economy was actually growing at the time Bill Clinton rode “It’s the economy, stupid” into the Oval Office. It had not been growing long enough or fast enough to create the feel-good factor that Bush the elder needed to overcome the effective campaigning of Clinton and the attrition to his base created when America watched his lips, and they formed the words “tax increase.”

The political strategists want the economy to be growing smartly, and unemployment to be dropping, by mid-2003. Their guess is that it will take the voters some time to absorb the good news and see George W. Bush as a president they trust not only to wage war on terrorism, but to keep the economy on the right track. For the pols, the key to winning is to have the unemployment rate dropping by mid-2004, with rising share prices by then a nice but not crucial bit of frosting on the cake.

Bush has until next month, when he delivers his State of the Union address, to decide. My own guess is that he will take something from column “A” and something from column “B,” in both instances continuing the downward trajectory of the overall tax burden on America’s consumers and businesses.

This article appeared in London’s Sunday Times on December 1, 2002, and is reprinted with permission.