Bush fiddles while the economy burns.

Bush fiddles while the economy burns.

Bush fiddles while the economy burns.

Moneybox
Commentary about business and finance.
Oct. 11 2002 4:51 PM

Bush League Economics

Can't anybody here play this game?

Surveying the 1962 New York Mets, perhaps the most woeful assemblage of talent ever to take the field, legendary manager Casey Stengel plaintively asked, "Can't anybody here play this game?"

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I'm beginning to wonder the same about the Bush economic team. At a press conference on Oct. 10—the day after the Dow fell to a five-year low—Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans, former chief executive officers both, accused their erstwhile colleagues of willfully seeing the gray lining in all the silver economic clouds. "I don't understand why there seems to be a focus on the negative to the exclusion of the positive things that are going on," O'Neill said. O'Neill added that the economy could grow by as much as 4 percent next year, not the feeble 1.5 percent to 3 percent predicted by members of the U.S. Business Council. For his part, Evans pointed to strong consumer spending as evidence of a turnaround.

You have to wonder if these guys read the Wall Street Journal, which provides ample reason to focus on the negative, or if Evans has any clue of what's going on at his own department. About 20 hours after the press conference, Commerce reported that retail spending fell 1.2 percent in September. This unexpectedly large drop has raised fears that anxious consumers may finally be reining in their expenditures.

The lack of confidence, on the part of both business executives and consumers, could be a significant obstacle to economic growth.And while it's entirely possible we'd be in the same situation—or even in a worse one—with a different administration, the actions of the Bush economic team, from the president on down, have done little to bolster confidence. Over the past 20 months, the administration has been by turns overly optimistic, inconsistent on fundamental approaches to economic policy, and disengaged. The foreign policy trumpets are certain, loud, and sometimes even play together. When it comes to economic policy, the horns are out of tune, and they're being played by guys who don't have the chops to be soloists.

At a time when people are inclined to mistrust optimistic projections, heedlessly making pie-in-the-sky projections can be damaging—especially when it is beyond your power to deliver on them. Companies get rewarded for beating expectations but are punished more for not meeting them. The same holds for presidents. The Clintonites consistently made conservative projections on the deficit, the surplus, and economic growth, and reaped the benefits when the results came in better than expected.

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From its earliest months, as part of the effort to sell its tax cut, the Bush administration issued—and then irrationally stuck by—upbeat estimates about revenues, economic growth, and employment.By the spring of 2002, the surplus projected for the years 2002-11 had eroded to just $336 billion from $5.6 trillion the year before. But this stunning 94 percent decline didn'tcause the administration to rethink any of its plans. Indeed, the President's Office of Management and Budget has increasingly disseminated projections that are more optimistic than those of the Congressional Budget Office. The lack of confidence in the administration's ability to deal honestly with the new deficit may be one—one, not the—reason for the 323-basis-point spread between long-term and short-term interest rates. In other words, while long-term rates are the lowest in recent memory, they'd probably be lower still if the Bush administration hadn't revived fears about the deficit.

Treasury Secretary O'Neill, theoretically the lead voice on economic policy, has also been guilty of unnecessarily bold predictions and off-the-cuff musings that have done little to engender confidence. Remember Enron's collapse being part of the "genius of capitalism" and the wicked flip-flops on bailing out Brazil and Argentina? In September 2001, in the wake of the attacks, O'Neill averred with great certainty on the NewsHour With Jim Lehrer that "we will have new highs in our market indices in the foreseeable future." Oops. O'Neill's failure to tone down such happy talk about stocks and the economy has demolished his credibility with the markets.

When times get tough, some administrations propose concrete ideas meant to provide short-term relief, like increasing unemployment benefits or sending out tax rebates. Others prefer to focus on long-term structural fiscal measures such as permanent tax cuts. In time, the latter theory goes, the economy will respond to the medicine if the government just stays out of the way. In general, the Bush team has opted for the latter approach. But this posture has been consistently undermined by efforts to micromanage portions of the economy for immediate political gain and in ways that undermine the broad principles that Bush says are fundamental to economic growth. So thepresident who trumpets free trade as a solution to global economic woes has led the charge for tariffs on steel and signed off on a massive subsidy for U.S. farmers. The energy strategy proclaims the absolute need to begin drilling for oil in the Arctic National Wildlife Refuge immediately, but not off the coast of Florida, where such activity might damage the political prospects of the president's brother.

In theory, Lawrence Lindsey, director of the National Economic Council, should provide the intellectual ballast for a consistent policy. But Lindsey has been singularly unimpressive as a government official.In his rare appearances, he tends to dish out supply-side gruel that is both thin and stale. Moreover, his pronouncements frequently undermine his boss's contentions. In September, he said the war with Iraq would cost between $100 billion and $200 billion, but that spending such a sum would not have any serious economic consequences. Weeks before, the administration threatened to veto $5 billionin spending in a homeland security bill, because, as President Bush put it, "Excessive spending will serve as a drag on economic growth." So $5 billion will sandbag a $10 trillion economy, but $100 billion won't?

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The flighty economic policy contrasts sharply with the more coherent foreign policy, in large part because Bush has personal relationships with the principals: Vice President Dick Cheney, Defense Secretary Donald Rumsfeld, Secretary of State Colin Powell, and, most intensely, National Security Adviser Condoleezza Rice. When it comes to the economic team, only Evans is a true Bush insider. You can bet Lawrence Lindsey isn't spending his weekends jogging around Camp David with the president. Among the team, only OMB Director Mitchell Daniels has been endowed with a cherished nickname, "The Blade." (Given his ineffectiveness at containing spending, perhaps "The Butter Knife" would be a more appropriate.)

As a result, the president himself seems entirely disengaged from the formulation and explication of economic policy. The president has no intuitive feel on how to speak about the economy or how to reassure investors. There's none of the clarity the folks at the Weekly Standard love so much. ("We are both supply-siders and Keynesians," Bush is reported to have said last fall.) Bush arrived at the economic summit in Waco last August with no set agenda—other than looking involved—and then impulsively latched onto Charles Schwab's suggestion to increase the amount of stock-market losses investors can deduct from their income.The House has passed a version of it, but Bush hasn't mentioned it much since. And besides, what economic theory is served by providing an incentive for people to dump stocks between now and the end of the year?

Of course, this tax break, which won't provide any relief for people whose 401(k)s have been hammered, certainly won't do anything tostop Ford's slide toward a junk credit-rating or reopen the shuttered IPO market. And the fact that the solutions Bush proposes bear little relation to the problems may be a sign that he just isn't aware of them. Has anybody told President Bush that J.P. Morgan Chase may be just a few credit downgrades away from throwing the mammoth derivatives market into turmoil? Or that the double-digit increases in health-insurance premiums are killing corporate profit margins? Or that constituents of the S&P 500 collectively owe some $243 billion to their pension plans? Judging from Bush's public statements, you'd have to say the answers to all of these questions is no. And I'm doubtful that his surrogates have a game plan to deal with all—or any—of these problems.

There are a million and a half variables that affect business and consumer confidence. But you don't have to be a partisan Democrat to believe that this administration's failure to present a consistent message or devise original solutions to some of the new problems our economy faces hasn't helped matters. To its credit—I'm choking on these words—the Wall Street Journal editorial page has been all over Bush on issues like free trade and spending, even if it thinks all our problems will be solved through more tax cuts.

When it comes to the economy, Bush simply hasn't been a good manager. His economic team plays more like the baseball team he once owned, the Texas Rangers. It's a haphazardly assembled group of well-regarded free agents that perpetually disappoints.