December 18, 2002

This week's top economic question, along with how Christmas sales are going, is what does the change in President Bush's economic team mean?

A consensus explanation already has formed. 

According to this discussion, Treasury Secretary Paul O'Neill was too honest while National Economic Council head Larry Lindsey was too aloof.  O'Neill also was criticized for worrying about deficits while Lindsey provided the President with the lame economic argument during the Congressional elections of making the decade long tax reductions permanent instead of having them expire. 

Lindsey also caught criticism for his $200 billion estimate of the cost of an Iraq war. 

The argument is that the President needed better sales staff for his economic policies.  Bush also needed a conduit into the financial community that was not apparent from his existing team. 

President Bush certainly knows that his father lost an election after winning a war because job creation during his administration was an anemic 400,000.  So far, the son is more than 1.2 million jobs behind his father with two years to go before election.  And the trends are not favorable. 

More than selling is needed by this administration and the President knows it.  That is why he is thinking about choosing a major player in the Concord Coalition as his replacement for Larry Lindsey. 

For those who do not know about the Concord Coalition, it is a bipartisan organization that is concerned that government borrowing is hurting the opportunities of future generations.  The organization advocates changes in social security financing and objects to long term deficit financing of government operations. 

There are also some in this administration who criticize the Coalition for opposing deficit financed tax cuts.  Of course, the President is not seeking former Goldman Sachs co-chairman Friedman (with Robert Rubin) because of his Coalition ties but because of his Wall Street connections.  The President clearly believes that his tax cuts are self financing, so there is no conflict with the Coalition's goals. 

Few economists would agree with the President when he declares that government deficits would have been higher in the past year if his tax cuts were not enacted.  Indeed, the evidence for multi-year tax programs is that the economic stimulus is muted in the early years as taxpayers wait for the larger incentives in later year. 

Furthermore, only at high tax rates, such as those that preceded the Kennedy reductions, are the near term economic incentives sufficient to create enough additional tax base to offset reduced tax rates.  Even most of those presidential advisors who believe that tax cuts have strong supply side incentives recognize that the current tax cuts add to deficits. 

However, those advisors believe that deficits are not important.  If incentives for growth are improved in the U.S., the world will send its savings here.  Therefore, deficits will be self-financed by international capital flows in addition to the expanded tax base according to that argument.  That those capital flows will strengthen the dollar and lower U.S. competitiveness around the world is not addressed. 

The President was able to see the political risks of merely making the 2001 tax provisions permanent. Except for removing some uncertainty about tax policy, making those provisions permanent impacts the next decade, not the next two years.

Furthermore, those provisions were not originally permanent because the revenue loss and shifting tax benefits by income class in the next decade would have invited serious political opposition.  That the Democrats were not able to exploit those issues during the Congressional races reflects more upon the ineptness of Democratic leadership than upon the strength of the President's proposals. 

So, the changes in Bush's economics team were made to get a new program that will create jobs in the next two years.  Tax cuts are the preferred stimulant of this administration, and more of them will be introduced.  However, they must lead to spending rather than to deficit financing.  Thus, increasing the contribution limits on tax deferred accounts will not do the job.  Purchasing power must be transferred to households for them to use, not to save. 

I would add grants to state and local governments as part of my package and certainly would continue to extend the unemployment benefits, but these are viewed as Democratic issues.  I certainly would bring the reduction in marginal tax rates forward to 2003 instead of waiting the decade for those incentives to fully materialize. 

Although Mr. Snow is a railroad man, he also has a Ph.D. in economics.  Friedman, if appointed, will have access to all the thinking, both socially desirable and self serving, that Wall Street can muster.  They must be installed and be allowed to finish the economic program that the President needs.  If they are only to sell someone else's work, then the President already is in trouble. 

I am hopeful that the new program will create jobs soon, whatever that program is.  However, the President speaks on economic issues with a certainty that only a student who has completely memorized his lessons can have.  He knows he needs new teachers.  Now will he understand?

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