May 08, 2003

Bemused

One of the strangest things about the George W. Bush administration is its refusal to propose a stimulus package that would actually stimulate the economy. Nobody believes that this is an administration that would decide that it is more important to pursue economic policies that are good for the country as opposed to those that generate good employment news in the summer and fall of 2004. And here what is good for the country--short-term fiscal stimulus--and what is good for President George W. Bush's reelection chances are perfectly aligned.

So why the continued focus on policies that all serious analysts agree have little effect on employment in the short term? It's a total mystery. It's as if the economists have been unable to persuade anybody else in the White House that economic policies, like, affect, you know, the economy.

Here the Economist piles on, telling its readers that Bush's claims that his program will boost the recovery are simply not credible.


Economist.com: Another Bush, Another Jobless Recovery: ...The White House claims that if Congress passes tax cuts worth at least $550 billion over ten years, it would create 1m new jobs by the end of next year. A long-awaited study by the administration's number-crunchers is rumoured to show that one-third of these new jobs would come from eliminating dividend taxation, while many of the rest would come from accelerating cuts in marginal income-tax rates...

Sadly, Mr Bush's claims are not convincing. The notion that a tax plan's ten-year price-tag provides any measure of its efficacy as a short-term stimulus is absurd. The central component of Mr Bush's tax plan?the elimination of dividend taxation?would improve the tax code and, probably, long-term growth, but it would do little to boost the economy now. Mr Bush's people say that ending dividend taxation would raise share prices, which in turn would boost spending. Most economists reply that the boost to share prices would be fairly undramatic (a 5-15% jump is the consensus guess); and any effect on spending would be small and gradual.

For all his hustling, Mr Bush's original plan is being heavily modified in Congress. Both the House and Senate are in the process of passing different tax-cut bills.

On May 6th, the House Ways and Means Committee passed a $550 billion tax package, whose central provision was to cut taxes on both dividends and capital gains to 15%. As The Economist went to press, Charles Grassley, the chairman of the Senate Finance Committee, seemed to have won support from his fellow Republicans for a bill including $430 billion of tax-cuts over the next decade. His bill would exempt the first $500 of dividend income from taxation (which would mean most investors paid nothing). There would then be a sliding scale of cuts for richer investors who pay most of the tax. Altogether, it would cut dividend taxes by only a fifth?which would annoy Mr Bush. Conservatives are also unlikely to be happy with a $20 billion bail-out for the states.

That last provision could win Democrat support. Money for the states is part of Senator Tom Daschle's $152 billion package?alongside tax credits for families and businesses and an extension and expansion of temporary federal unemployment insurance (which the White House is prepared to let expire at the end of May).

In the end, the Republican Congress looks likely to force through a stimulus package that is largely based around tax cuts. Some of these measures may be sensible long-term reforms, and returning money to taxpayers is seldom unpopular. But the stimulus will not create many jobs now, whatever Mr Bush says...

Posted by DeLong at May 8, 2003 12:28 PM | TrackBack

Comments

It is perfectly rational given 1) Bush's obsession with punishing people who are disloyal to him (you can bet more than 50% of the unemployed voted against him, hence he is not interested in helping them), and 2) Bush's belief that he can gain the support of those he has victimized by dressing up as a Might Morphing Power Ranger.

Posted by: Instahack on May 8, 2003 12:47 PM

Perhaps the Admin believes that no form of stimulus would actually work well enough to forestall further problems with the economy, and so (1) get what you can in terms of restructuring the permanent tax structure, and (2)count on getting partially rolled in the Congress so the Admin can claim that it's not the president's fault when there is an insufficient economic recovery: "They did not pass my jobs plan".

Posted by: JM on May 8, 2003 01:13 PM

Bush ideology is incompatible with rational economic advice. That much was clear from early 2001. Many have written about that same pattern when Bush was governor of TX.

"With Bush, what you get is all you get." -Ivins

Posted by: bakho on May 8, 2003 01:24 PM

Interested in the Democratic alternative go here:

http://www.house.gov/budget_democrats/

Posted by: bakho on May 8, 2003 01:28 PM

Professor De Long

Thank you for your website. It is helpful for non-experts like myself that want to encourage economic literacy.

John Wilkins

Posted by: john wilkins on May 8, 2003 01:53 PM

Professor De Long

Thank you for your website. It is helpful for non-experts like myself that want to encourage economic literacy.

John Wilkins

Posted by: john wilkins on May 8, 2003 01:54 PM

"returning money to taxpayers is seldom unpopular."

Returning money the government doesn't have?

Maybe The Economist should say taxpayers will always believe that they can get somthing for free.

Posted by: markmeyer on May 8, 2003 02:01 PM

I am looking forward to a future in which military spending will *have to* be cut to finally match federal spending with taxes. Indeed, what will tomorrow's babyboom voters choose for: their social security or new toys for the DOD? I have finally found a way to put a positive spin on the Bushies' attempt to put the Federal Government on its knees. ;-)

Posted by: Jean-Philippe Stijns on May 8, 2003 02:19 PM

So what's the real unemployment rate, and where is it available?

Posted by: goethean on May 8, 2003 02:42 PM

Oh. I figured it out.

1.9m long term unemployed people => .655%
Therefore, unemployment including long-term = 6.655% ?

Posted by: goethean on May 8, 2003 02:52 PM

...but the Economist article chart shows total unemployment including long-term at close to 9%.

what gives?

Posted by: goethean on May 8, 2003 02:55 PM

I love this giving the people their money back spin. Didn't we hear from our parents that money does not grow on trees? Isn't many an economist office lined with the adage "there is no free lunch"? But the real analogy for Bush fiscal policy comes from Enron accounting: defer the recognition of expenses and accelerate the recognition of revenues. But then Wall Street is weary of such accounting gimmicks from both individual companies and politicians. I wonder if the most effective stimulus package might be fiscal credibility, which just might generate more investment?

Posted by: Hal McClure on May 8, 2003 03:54 PM

I recall Bush41's "L-shaped" recession/recovery. The technical recovery started earlier than anybody realized at the time ... it could only be detected in retrospect, with a statistical fine-tooth comb.

Is Bush43's recession a "W" (for Dubya)? Or an "L" (for Loser)? Or is it the leading edge of a longer, larger dislocated economic knee-joint? Only future history knows for sure.

Posted by: RonK, Seattle on May 8, 2003 04:40 PM

>>I love this giving the people their money back spin<<

How about giving people back their share of the national debt?

Posted by: richard on May 8, 2003 04:53 PM

I don't know where truth lies. However, as one who has quoted previously (and some might say ad nauseum) the platform of the Texas Republican Party, this is an ideological administration. If those in charge think flying into an aircraft carrier for a tailhook landing will advance their ideology, the decision is easy. Economics and ideology have always been difficult to sort out. In such circumstances, ideology wins every time.

Posted by: Sam Taylor on May 8, 2003 05:45 PM

I don't know where truth lies. However, as one who has quoted previously (and some might say ad nauseum) the platform of the Texas Republican Party, this is an ideological administration. If those in charge think flying into an aircraft carrier for a tailhook landing will advance their ideology, the decision is easy. Economics and ideology have always been difficult to sort out. In such circumstances, ideology wins every time.

Posted by: Sam Taylor on May 8, 2003 05:47 PM

>>Economics and ideology have always been difficult to sort out. In such circumstances, ideology wins every time.<<

Fortunately or unfortunately, reality eventually catches up... But then, of course, one can always put out more rhetorics. It's a lot like printing money though. At some point the public realizes that it's not "worth the paper on which it's printed."

Posted by: Jean-Philippe Stijns on May 8, 2003 06:57 PM

Hmm... perhaps Bush believes that he can win the 2004 election (or otherwise remain president) without paying attention to the economy? If an election were held now, Bush would win. If Bush doesn't see helping the economy as necessary to maintaining presidency, then perhaps an economic recovery would hurt his interests, since it would damage the prospects for his own brand of stimulus (i.e. "We have big deficits, but we're in a recession and need stimulus, so let's cut taxes" goes over easier than "we have big deficits and a booming economy, so let's cut taxes.").

Posted by: Julian Elson on May 8, 2003 09:10 PM

And me just having re-read "The Triumph of Politics" by Stockman. All those numbers seemed so quaint compared to -$500,000,000,000.

And Larry Kudlow was a supposed voice of reason(ignored, or course).

Could someone please calculate how many trillions of dollars have been paid to service the Reagan deficit by now? I might have use for that number to beat some sense into some people who are apparently innured to the harsh facts of economic life for ideological reasons.

Posted by: David Glynn on May 8, 2003 10:09 PM

Julian Elson writes:
>Hmm... perhaps Bush believes that he can win the 2004
>election (or otherwise remain president) without paying >attention to the economy? If an election were held now,
>Bush would win.

Oddly enough, I'm not sure I accept that last statement. I guess if you look at his poll numbers today, you might guess that. Note, however, that if the election were next Tuesday, we would have been in the midst of a major political campaign where the challenger would be running hard against Bush on economic issues from unemployment benefits to the fiscal crises in the states to the reappearance of massive structural budget deficits and their likely effect on long-term interest rates. It's safe to say that Bush would not be riding so high in the polls, and I think the election would be closer than many expect.

The only thing that makes sense here is that Bush is banking on the fact that the economy will improve shortly no matter what he does (ok, so he shouldn't try to balance the budget this year) and so the campaign can be waged on terms that suit him better. Now, there is some possibility that things won't pick up quickly, in which case Bush is definitely going to need a Plan B. The afterglow from the Iraq invasion will be undetectable by election day, while it's unclear that a Republican convention orchestrated to take advantage of the second anniversery of 9/11 will give the kind of "bounce" that is being expected. A point that *should* disturb the Bush camp quite a bit is that if the 2004 election has voters voting the same way and in the same relative turnout as they did in 2000, changes in demographics from then to now suggest he would lose the popular vote by 3 million or so. It's unlikely that he could win in the Electoral College with that kind of split, so the question would be: how can he change the turnout, or convince 3 million people that they should vote for him instead of somebody who will probably a better campaigner than Al Gore?

Posted by: Jonathan King on May 8, 2003 10:37 PM

"And Larry Kudlow was a supposed voice of reason(ignored, or course)."

Say *what*? Please elaborate.

Posted by: Jason McCullough on May 9, 2003 02:00 AM

I am coming to a glimps of Bush's modus operandi. There have been two major policy issues in Bush's presidency: the rollback of "big governemnt" and the "war on terror".

The rollback has been both subtle and in-your-face. The subtle rollback is in the tax cuts. Other commentators, especially recently Greider in The Nation, that the conservative raison d'etre is too shrink government. So, Bush is slashing at the revenue side: cause a crisis in revenue to force rollbacks in services. Better yet, make those rollbacks so far down the line, term limits will come into play before one's come uppance.

How to do it? Why, lie one's posterior off. Remember all those 25000 liters of Sarin in Iraq poised to be unleashed from drone aircraft? Ooops...that was info from hired guns making up intelligence. Tax cuts add jobs? Proffered by hired guns makig up justification based upon dismal economics (the dismal, dismal science).

It all is becoming clear to me now...

Ben

Posted by: Ben Ricker on May 9, 2003 11:04 AM

>>The afterglow from the Iraq invasion will be undetectable by election day, while it's unclear that a Republican convention orchestrated to take advantage of the second anniversery of 9/11 will give the kind of "bounce" that is being expected.<<

Yep, but this is a big wild world, and remember: we're in for the long haul... There is Syria, NK and Iran. And wheels can always be added to any axis... The wild card is: how would a Presidential election play in wartime? (And I really, really, hope I'm making a forecasting error on this one.)

Posted by: Jean-Philippe Stijns on May 9, 2003 02:09 PM

"It's a complete mystery."

Sherlock Holmes might notice the following clues:

The telltale residue of poison on the lips of the deceased economy --- the poisonous, election campaign remarks by Cheney et al. throughout 2000 that a poisoned corpse might turn up -- staggering
state governments showing signs of revenue starvation -- no Federal revenue-sharing with States by an administration whose ideological heros have a long history of perfecting severe, debilitating weight loss as a panacea for starvation -- tugging on the same no-stimulus, tax-cut bell-pull over the bed time after time -- the corpses of government programs at all levels turning up in the bed with exotic snake venom in their systems; Social Security and Medicare are scheduled to sleep in the same guest bedroom soon --- the prime suspects exhibiting suspicious behavior in Washington D.C. after leaving a string of crippled victims in place like Texas and Colorado -- funds purloined for foreign intrigue necessitating cuts in the domestic stepchildren's upkeep .....

Ellafitzgerald, my dear whopper.

The suspects' ideological purity and hatred of the victims was later found to be so extreme that
even their self preservation was risked.

Too late for the victims.

Posted by: John Thullen on May 10, 2003 12:27 PM
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