SYNOPSIS: The tax cut slows growth in the short run and growth in the long run
Friday's jump in unemployment sent Wall Street into a tailspin, but it shouldn't have come as a big surprise. The U.S. economy may or may not be technically in recession, but it is certainly growing much more slowly than its potential. This "output gap" was bound to show up in higher unemployment.
More significant was the fact that the bad news on jobs followed bad news about consumer spending. The much-ballyhooed tax rebate, it seems, isn't having much impact. So much for cheery forecasts of imminent recovery. Now what? First, don't give up on monetary policy. The slump during the first Bush administration dragged on much longer than anyone expected, even as the Fed kept cutting. But in the end rate, cuts did do the trick. I wouldn't be surprised if the Fed's funds rate goes to 2 or lower before we really see a turnaround, but the odds are still that rate cuts will eventually work.
What about fiscal policy? Some liberals have recently made common cause with the Bush administration, arguing that the economic slump is a reason to put aside promises to protect the Social Security surplus. But those liberals are making a big mistake.
Even on the straight economics of the case, it is by no means clear what good it would do to give up on protecting Social Security. By and large, the spending decisions that Congress will make over the next few months won't have much impact on the economy until late next year at the earliest. Even pessimistic analysts think that a recovery will already be under way by then.
Furthermore, responsible behavior can be rewarded -- and irresponsible behavior punished -- quite quickly. In 1993, in the face of a still-sluggish economy, Robert Rubin and Larry Summers urged Bill Clinton to commit himself to fiscal discipline. Such a commitment, they argued, would help keep long-term interest rates down and would do more to stimulate the economy, even in the short run, than any attempt to pump it up with deficit spending. And they were vindicated by events.
So even an administration that is sincerely trying to fight an economic slowdown should be held to its fiscal promises. And when an administration isn't sincere about its motives, it's even more important to hold it accountable.
Those are strong words, but George W. Bush has a consistent pattern: he doesn't respond to events by changing his policies; he merely uses those events to justify his original agenda. One need only point to the way he used a short-term economic slowdown to push through a long-run tax cut almost identical to the one he proposed back in November 1999.
Given that the Bush tax cut wasn't designed to fight a recession, it's no surprise that it isn't working. The only part of the tax cut that does anything for the economy this year is the rebate -- added to the plan at the insistence of Democrats. And the rebate is less than 2 percent of the 10-year total. Even if consumers spent it all (and it's already clear they won't), the rebate would hardly make a dent in the unemployment rate.
Meanwhile, the tax cut will cost the Treasury at least $2 trillion after 2004 -- that is, after the economy will supposedly have recovered. That does little or nothing to fuel current consumer spending. But as Mr. Rubin and Mr. Summers could have told you, the prospect of long-run fiscal irresponsibility keeps long-term interest rates high. In other words, the Bush tax cut, aside from its devastating impact on long-run budget prospects, is also a short-run drag on the economy.
Is there any reason to suppose that Mr. Bush, if he is allowed to get away with breaking his promises on Social Security, will use his freedom of action to any better effect? None at all. In fact, during his brief press conference after the unemployment numbers came out, Mr. Bush did it again. Now that the excuse of a supposed energy crisis has evaporated, he tried to sell Dick Cheney's energy plan -- the one that won't produce any oil for at least a decade -- as part of his plan to fight the current slowdown.
So to those who think that Mr. Bush should be released from his promises because of the weak economy: think again. Mr. Bush won't use his freedom to good effect; he will simply use it -- and you -- to do more harm.
Originally published in The New York Times, 9.9.01