On Repairing Economic Damage
America is really going to need a tax cut after the war.
BY ROBERT L. BARTLEY
Monday, March 10, 2003 12:01 a.m. EST
URL:http://www.opinionjournal.com/columnists/rbartley/?id=110003179
President Bush calls "for people to show their cards," and Gen. Tommy Franks says he's ready. With a March 17 deadline, the liberation of Iraq finally seems at hand. But we should stop to note that repeated delays have been costly in many ways, not least in spreading uncertainty that stunts the economic recovery.
While the decision to wait for a first U.N. resolution was vindicated, diplomatic momentum faltered after the first Blix report, the Powell speech and the show of support from "new Europe." Convoluted Turkish politics blocked timely deployment of a heavy backup force to insure against unexpectedly stiff resistance by Iraqi troops. Probably there is nothing to do about these diplomatic and military costs except to bear them.
As soon as military preoccupations fade, though, we're certain to have a vigorous debate on how to repair the economic damage. We've had an economy poised for a robust recovery from the 2001 recession, but the rebound has been restrained by uncertainty about investment prospects and future oil prices. Indeed, in the last week or so the economy has been burping and belching, most spectacularly with Friday's report of a hemorrhage in the job market.
Over the last three years the economy proved it can endure a lot of punishment. It absorbed the meltdown in dot-com stocks, the September 11 attacks, and the scandal epidemic in corporate suites. The surprise is not that there was a recession, but that it was so mild. The downturn lasted the first three quarters of 2001, with output falling a cumulative 0.6%, only a quarter of the average in the last seven downturns. With recovery starting in the fourth quarter, the economy actually grew in 2001, albeit only 0.3%. In 2002, it grew 2.4%, a respectable if not stirring number.
Growth tailed off as war worries rose, however, coming in at 1.4% in the final quarter of 2002. In the current quarter, it will be lucky to hit 2%, and at the moment seems headed downward. Business investment has been notoriously laggard, while consumer spending remained strong. But the commerce department reported that personal spending fell in January, and auto makers are now cutting production runs. Manufacturing is weakening, and the economy lost more than 300,000 jobs in February. Consumer sentiment has also been falling and, the Michigan survey center says, would be lower except that everyone expects current problems to be temporary.
Odds still rest against a double-dip recession, but the latest bad news casts a shadow. We can't be sure that the economy will automatically rebound when Saddam Hussein is gone; perhaps the current sluggishness will turn self-perpetuating.
At the same time, the economy's performance in the face of adversity suggests an underlying potential for strong growth. In my book, we shouldn't be content with growth of 3% in real output over the next few years, but should look toward the 5% range. Productivity is surging; despite the dot-com collapse we are realizing the efficiencies of an information economy. The issue is how to unleash this potential, which brings us to the Bush economic proposals.
Actually, the administration has if anything undersold its tax-cut ideas as an antidote for sluggish growth. Outgoing economic adviser Glenn Hubbard struck a careful note in his Economic Report of the President; the tax plan would "enhance the long-term growth of the economy while supporting the emerging recovery." This reflects the current tastes of the economics fraternity--that fiscal legislation can't be enacted fast enough for counter-cyclical policy, which should be left to monetary policy while tax policy looks to the long-term.
N. Gregory Mankiw, set to replace Mr. Hubbard as Chairman of the Council of Economic Advisers, is cut from the same cloth. Yes, he had a dog named Keynes--rather unimaginative, I thought; should have been Maynard. Yes, he said that deficits drive up interest rates and crowd out private investment, but everyone agrees with this as an accounting identity. The issue is whether the effect is more than trivial, and whether it's offset by other effects of deficit, or rather by the fiscal actions that caused the deficit. And yes, some editions of his text talked of Reagan advisers as "charlatans and cranks," a sop to Ph.D. economics professors who are his customers. Maybe these sentences vanished when Robert Mundell won the Nobel Prize.
While I don't know Mr. Mankiw, I know that his work is much more interesting. Some readers of his textbook, for example, saw it as an abandonment of Keynesianism and a return to classical economics. He has even written that when taxpayers face extremely high marginal rates, lower rates will produce more revenues. He also signed an economists' petition against Hillarycare, and lambasted Harvard for refusing to sponsor ROTC. In taking a Bush job, he surely knew what he was signing up to sell, and we'll find him an effective voice for the Bush plan over the long term.
I would add that the long term starts tomorrow. The Bush tax proposals are the only serious ideas on the table to solidify the recovery and realize the economy's current growth potential. Democratic spending initiatives don't stimulate anything; they merely take money from one pocket and put it in another. Even monetary policy has uncertain effects, and its potential is limited because short-term interest rates can't go too much lower. The mainstream economists certainly have a point that "fine tuning" is a fatuous notion in a $10 trillion economy, but it's also true that when the economy needs a boost what will help in the long term will help now.
Economic policy is inextricable from diplomatic and military policy. At this point in history, the U.S. has little choice but to assume world leadership, and this entails the ability to sustain economic growth. It may not be possible to avoid pre-war uncertainty, but it is possible to get serious about economic policies to repair the damage as completely and quickly as possible.
Mr. Bartley is editor emeritus of The Wall Street Journal. His column appears Mondays in the Journal and on OpinionJournal.com. |
