The Washington Times
The Bush administration put a huge bet down on the American economy, and the reported 7.2 percent real GDP growth rate in the past quarter is an indication the bet is paying off.
Mr. Bush has correctly described the economy since he took office as just “bumping along,” not in recession for long but not showing especially strong vital signs either. As to why this was so, I am agnostic, and would advise those who demand an explanation to consult their local economist. It’s the political fact that concerns us here. True, things were never as bad as his Democratic critics claimed. But, on the other hand, Mr. Bush clearly understood that all by itself, an economy just “bumping along” could deprive him of re-election.
Mr. Bush campaigned on cutting taxes. Upon taking office, he startled even some of his supporters by the determination with which he pursued his first tax cut. It was, by any reckoning, a large one, locking in reductions each year over the course of a decade, the cumulative effect of which was substantial policy change.
But here’s the political problem: The reason the cuts were to be phased in was to hold the total cost of the package over 10 years to a number lawmakers would find acceptable [bear in mind that the context was a period of unprecedented federal budget surpluses]. Some decry Washington budget gimmickry; others practice it; most decry it when they are out of power and practice it when they are in. Did the phase-ins “hide” the true cost of the policy changes Mr. Bush was making? Was he not a lying liar, along with the lying horse he road in on? Please. The effects of the policy changes in year 11 start showing up in year two, the next year’s 10-year budget window, and the administration has to deal with the consequences.
But there was a policy problem here for Mr. Bush. Although he had enacted some fairly substantial tax relief, it was going to take a while before anybody felt it. Moreover, the phase-ins meant that the beneficial economic effects GOP policy-makers anticipated would also be delayed [although one might expect a small boost because people knew they were coming].
In Mr. Bush’s second year in office, the economy was still bumping along, and it wasn’t clear to anyone how long that might continue. The world was a mighty uncertain place following September 11, the stock market had tanked – and taxpayers were receiving tax relief that year amounting to less than 5 percent of the 10-year total. Mr. Bush had very little of his new policy package in place and, accordingly, little to show for it.
But there’s more than one budget trick in the book. Yes, you can phase in your tax cut to keep the 10-year total politically palatable. But you can also accelerate your policy changes so that they take place in the first year of the 10-year package and then “sunset” them in later years. Once they pass their expiration date, they no longer “cost” anything, so the price tag of the package is lower. And, you get the impact of your policy sooner rather than later.
This Mr. Bush did with the tax cut enacted earlier this year. Now, of course, everyone knows that Mr. Bush and Republicans more generally would like to make the tax cuts permanent before they expire. Was this not, then, another exercise in concealing the true cost from the American people? No, it’s a political and policy bet: that future circumstances, including the overall federal budget outlook, will be favorable to extending the cuts or making them permanent rather than letting them expire. That’s not a sure thing; it requires congressional action.
The political part of the bet is easy to understand. Although it takes no further action by Congress to let the tax cuts expire, Republicans will paint such inaction as a tax increase. The policy piece is this: Republicans are hoping for higher-than-anticipated economic growth – growth that is off the charts in terms of budget forecasts. The Congressional Budget Office forecasts growth of 3.8 percent in 2004, gradually tapering off to a 2.6 percent annual rate in the final years of the 10-year forecast. The key to political happiness [not to mention greater overall prosperity] is to beat those numbers. If you can do so, your deficit projections improve and your policy options open up further.
The Bush administration pulled out all the stops. You have the supply-side effects of greater incentives from lower tax rates and the demand-side effects of more money in people’s pockets, coupled with ultra-low interest rates and the “stimulus” of sharply increased federal spending. If the economy doesn’t surge in these conditions, something is really wrong.
And, of course, it’s over the next couple of quarters that voters will be forming the impression of the economy that will guide them at the voting booth next November.