Bush's report card mixed

Author: Michael E. Kanell

Published: August 10, 2003

Roughly 15 months before the presidential election, judgment of the Bush administration's performance on the economy is about as divided as opinions of its foreign policy.

Bush has overseen two huge tax cuts, a shift from a budget surplus to record deficits and a trade policy combining free-trade notions with a few protectionist exceptions. He has told Americans that he inherited a slowing economy, while predicting a return to job growth.

Indeed, recent news has been encouraging: a pickup in business investment, stronger orders for big-ticket goods and healthier sales among companies selling services.

But jobs are still disappearing --- about 3 million since 2001. Barring a very strong economic finish to his first term, Bush will be the first president since Herbert Hoover to preside over net job loss.

Is it his fault? Or have Bush policies mitigated a bad situation?

Among Bush economic policies, tax cuts may loom largest.

At the start of his 2000 campaign --- when the economy was seen as strong --- Bush stumped for tax cuts. After the slowdown started in 2001, he argued that tax cuts would stimulate the economy, and Congress passed his 10-year, $1.35 trillion tax package.

By late summer, the first rebate checks were putting money in consumers' pockets. Many rebate checks arrived in the weeks after the Sept. 11 terrorist attacks.

The economy started growing in late fall --- and has grown since.

"At the very least, the Bush tax cuts [in 2001] helped lift the economy out of recession modestly and countered the effect of the terror attacks," said economist William Beach, director of the center for data analysis at the Heritage Foundation.

But even conservatives say that help was modest. A Heritage Foundation study concluded that the cuts increased U.S. growth by just 0.2 of a percentage point a year and trimmed unemployment 0.2 of a point.

A study by University of Michigan economists Joel Slemrod and Matthew Shapiro showed that less than 25 percent of the 2001 rebates were spent.

This spring, Congress passed another 10-year tax package based on Bush's proposals. Again, it is expected to offer just a modest kick to the economy, while critics charge the cuts widen the gap between the rich and the rest of America.

And the economic stimulus is being undercut by the effect of tax cuts on the states and localities. Since many state taxes are pegged to federal rates, the cuts also trim state revenue.

Those governments --- unlike the federal --- cannot run budget deficits.

Conservatives say state spending had swelled beyond need during the boom, that bloated local governments did not react quickly to the recession by slicing programs. But, bloated or not, states now cutting budgets are a brake on growth, economists say

Supporters say the tax cuts build the foundation for the next economic boom. Lowering taxes --- especially on dividends --- provides incentives to entrepreneurs and investors who will make that boom happen.

Critics argue that Bush policy essentially ignores the economy's current pain.

While easing the tax burdens of the wealthy, Bush has not proposed programs to train laid-off workers or soften the blows, or targeted tax cuts at poor and middle-class families more likely to immediately put the money into circulation, said economist Max Sawicky of the Economic Policy Institute.

Bush supporters argue that tax cuts simply mean letting taxpayers keep more of their own money and since the rich pay more taxes, they naturally get the biggest bonus. The cuts will trim taxes on the richest 1 percent by 17 percent by 2010, while the other 99 percent of taxpayers will see taxes fall 5 percent, according to the Institute on Taxation and Economic Policy.

"The point is to use the power of the federal government to eliminate stress when it's possible," said Sawicky. "In that respect, they have failed miserably."

Deficit criticism

Where the Bush economic policies smack into the broadest criticism is on the deficit.

A surplus of $236 billion in 2000 has turned into a deficit estimated at $455 billion this year and $475 billion the next.

The dive into deficits can be blamed on a mix of factors. Federal spending has exploded, much of it for the military and at least some of that pegged to the Sept. 11 terror attacks. Meanwhile, government revenue fell, thanks to the recession and the tax cuts.

Tax cuts account for one-third of the deficit, according to the Center on Budget and Policy Priorities. But spending is also a large piece of the deficit.

The ballooning deficits have drawn conservative fire.

The first three Bush budgets call for spending to climb a total of 19.6 percent, said economist Kevin Hassett of the American Enterprise Institute. "Were a Democratic regime to spend like this, Republicans would be grabbing their pitchforks and taking to the streets."

Long term, the danger is that deficits stifle savings and nudge interest rates higher, said economist William Gale of the Brookings Institution, co-chair of the Tax Policy Center, last month in testimony to Congress.

"The economic effects of persistent budget deficits are gradual, but they are debilitating nonetheless," he said. "To put it differently, controlling the deficit is a pro-growth policy."

But, Gale argued, what is most dangerous is just over the horizon --- the need for unprecedented payouts for Social Security, Medicaid and Medicare when the baby boomers start retiring in a few years.

Even the Cato Institute, an emphatic friend of lower taxes and smaller government, believes Bush has gone beyond sensible change.

"Sure, taxes are unpleasant to pay," wrote Jerry Taylor, director of natural resource studies at Cato. "But someone, someday has to pay for the government we're buying every year. Deficit spending just puts off the day of reckoning but with interest."

Conservatives have long been skeptical of the idea that massive spending would spur the economy.

"If the government is buying planes but Boeing is buying a lot of the parts from Korea and Japan, it might not have that much effect," Beach said. "Spending of $1 should not directly translate to $1 consumption."

During the height of World War II, defense spending accounted for more than 37 percent of the economy. Now, even with the buildup that began in President Clinton's second term, military spending represents less than 4 percent of the economy.

Still, a burst of spending can have an effect. And the impact --- at least in the past few months --- has been substantial.

The nation's economy grew 2.4 percent in the last quarter, modest but much faster than expected. And first reports show 70 percent of the growth could be pegged to a surge in military spending.

Perhaps ironically, it is liberals who say massive spending should spur the economy. While fearful of deficits down the road, they argue that a deficit right now is a way to borrow money and pour it into a needy economy.

But what they don't see are results. "The short-term effect should be huge, which we haven't really gotten yet," said EPI's Sawicky.

Political linkage

Until the Great Depression, the economy wasn't really seen as the president's job. Business cycles happened --- up and down --- and the White House, like everyone else, simply waited for bad times to pass. But with the 1932 election of Franklin D. Roosevelt came a political linkage that has boosted incumbents during booms and poisoned re-election bids when times were tougher.

Economic woes helped torpedo the two most recent one-term presidents --- Jimmy Carter in 1980 and George H.W. Bush in 1992.

Yet the president carries far less economic ammunition than the Federal Reserve. For example, the Fed's two-year rate-cutting campaign has helped spur hundreds of billions of dollars in spending and savings --- dwarfing budget changes that an administration can make.

But this White House has seemingly been in tune with the Fed.

An endorsement by Fed Chairman Alan Greenspan was critical to the widespread congressional support for the tax cuts. Bush has said he plans to reappoint Greenspan.

"There has been an informal coordination between the White House and the Fed," Beach said.

Economists say presidential responsibility is exaggerated but inevitable.

When the economy falters, voters look to government for another "dose of the fiscal medicine," said Michigan's Slemrod. "Whether the doctor has effective medicine or not, something must be prescribed."

And, in the spirit of Roosevelt's dictum about fear, presidents can improve the economy by counseling confidence.

Advocates of balanced budgets argue that much of the sensational 1990s growth came because Clinton abandoned new programs and catered instead to bond traders.

By eliminating deficits, Clinton helped prod traders to keep long-term interest rates from climbing. That, in turn, made for a healthy investing climate.

"You can evaluate an administration's economic policies on how well they manage policy, how rapidly they make changes and whether they are consistent," Beach said. Bush gets high marks for that, he said.

The White House has also been consistent in predicting an imminent rebound --- and taking responsibility for it. Early this year, the president said passage of his tax proposal would mean 1.4 million new jobs in addition to the roughly 4 million that the economy would add anyway by the end of 2004.

That goal may be out of reach of anything but a sudden boom. But if the economy does continue its trek toward recovery, how much credit goes to the Bush administration?

Ultimately, whatever happens to the economy will be a political issue as much as an economic one. No president is likely to shrug off word that the economy is regaining momentum on his watch.

"When the economy is going well, governments are quick to claim credit, whether their policies had anything to do with the good times or not," said Slemrod.