[Mb-civic] NYTimes.com Article: Painting the Economy Into a Corner

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Painting the Economy Into a Corner

August 12, 2004
 


 

President Bush reacted decisively to this month's
shockingly bad employment report - by quickly changing the
topic to terror. The Federal Reserve chairman, Alan
Greenspan, also focused elsewhere, namely on rising oil
prices. Mr. Greenspan used inflationary energy costs as the
rationale for raising interest rates a quarter point,
despite the drastic slump in hiring and a recent slowdown
in productivity growth. 

What neither man seems ready to acknowledge outright is
that policy makers have run out of tools for stewarding an
economy that - nearly three years into a recovery - has yet
to flourish and may even be downshifting to neutral. The
president's fiscal policies, mainly high-end tax cuts, have
resulted in a record federal budget deficit without
spurring hiring or income growth. If Mr. Bush continues on
the tax-cut path, continuing high deficits will further
threaten job creation and living standards. 

Mr. Greenspan passed up opportunities to discourage Mr.
Bush's disastrous tax-cut strategy back when it might have
done some good. Instead, the Fed pursued its own
stimulative policy, pushing interest rates to the lowest
level in a generation. One result has been a debt load that
is a big factor in the overall decline in households' net
worth, despite the rise in housing values. That alone
argues for tightening the money spigot. Another reason for
raising rates is that the continuation of a cheap-money
policy would probably precipitate inflation, as a glut of
dollars would eventually feed rising prices. 

Mr. Bush and Mr. Greenspan have now exhausted almost all of
their stimulus options. The economy is on its own, and it
is not clear whether it is on track for a stronger recovery
in the second half of the year. 

No wonder, then, that Mr. Bush won't acknowledge the bad
news on jobs. Doing so would imply a need to re-examine the
policies that have led to this point, something he is not
willing to do. Given the facts, his intransigence is
appalling: according to a new research report by
Economy.com, an independent provider of economic data and
analysis, the $700 billion swing from surplus to deficit
under President Bush accounted for nearly two percentage
points of economic growth a year. But it has generated
economic gains of just over one percentage point. 

The main reason for the crippling discrepancy is that the
tax cuts were mostly handed out where they did the least
good - that is, lavished on the people least likely to
spend the largess. The reduction in the tax rates, the
largest of Mr. Bush's tax boons, provided only 59 cents of
economic stimulus for every dollar of lost tax revenue. The
tax cut for dividends and capital gains produced 9 cents of
stimulus for every forgone dollar. (Did someone say,
"Deficits as far as the eye can see"?) In contrast, the
economic bang for a dollar of aid to state governments is
$1.24. Yet such assistance accounted for only 3 percent of
the total cost of Mr. Bush's fiscal policies. 

The president was right to use a fiscal stimulus to counter
a recession - it's just that his favorite tactics were
wrong, and they failed to create an environment that
fosters growth in jobs and income. Now, along with outside
factors like oil prices, Mr. Bush's priorities are actually
contributing to the weak picture for jobs. And in a
perverse feedback loop, a continuation of these policies
will further swell the deficit, impeding job growth even
more. 

While the economy is still expanding and jobs are being
created, the pace pales in comparison with the pace of
other recoveries at this same stage. For real prosperity to
take hold, a much broader swath of the labor force must be
able to find jobs and earn decent wages. That isn't likely
to happen under Mr. Bush's policies. 

http://www.nytimes.com/2004/08/12/opinion/12thu1.html?ex=1093347509&ei=1&en=a7cf39f926c057b6


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