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THE ECONOMY - Combating the Clinton Recession
By Sheila R. Cherry
Bush and Congress are expected to use tax relief to fortify the wobbly economy that is greatly in need of steadying.
January 15-22, 2001
insightmag.com
When President Clinton took office in January 1993, he inherited an economy that since March 1991 had been on an unnoticed uptick. But some economists fear that when President-elect George W. Bush succeeds Clinton on Jan. 20, 2001, Bush will inherit an economy that is on a stealth downturn.
The unspoken fear is that, just as Clinton claimed credit for the nation's economic success, Bush will be blamed for any major economic difficulty. To avert that possibility, Bush-administration officials and members of Congress are gearing up to stop any potential economic softening.
"Against the backdrop of remarkably sustained economic growth, the macroeconomy shows signs of slowing as the economic risks facing the new administration grow," warned the Joint Economic Committee (JEC) in a Dec. 15 report to Congress. Monetary-policy tightening by the Federal Reserve and an unexpected spike in oil prices have begun to moderate economic growth, the JEC report asserted.
During the first six months of the Bush presidency, tax relief will be one of the major issues discussed, a JEC staff economist predicts, and "an economic slowdown would strengthen the case for them."
The conventional wisdom is to move expeditiously. If the economy already is slipping, Congress will want to do something during the first half of the year, the economist speculated. Expansion of the individual-retirement-account (IRA) program, which received broad support in the past, may be revisited by the end of the year to spur investment.
But with the margins in both houses of Congress ultrathin, bipartisanship will be a necessity. Bipartisan cooperation is not unattainable in the House, Ways and Means Committee spokesman Trent Duffy tells Insight. "The trouble is," he says, after the elections, "our Senate bipartisan support either retired or lost." Key Democratic centrists Sens. Bob Kerrey of Nebraska and Chuck Robb of Virginia, who both strongly supported tax cuts, now are gone. But for the Democrats who remain, Duffy notes that as the economy shows signs of slowing down, few will want to be blamed for impeding a solution because of partisan bickering. And, he points out, "the time to act is before negative growth happens."
It takes two consecutive quarters of negative growth to reverse an economic expansion, explains Aldona Robbins, an economist and vice president of Fiscal Associates Inc. in Arlington, Va. That has not yet happened, she notes. The average rate of growth in the United States, Robbins explains, is 3.5 percent. But the recent 10 to 20 percent growth experienced by the bull market has been reflective of an overvalued technology-stock bubble that fueled prosperity and inoculated the U.S. economy from downturns in the past.
That was before the Justice Department filed and won an antitrust lawsuit against software giant Microsoft Corp. "Microsoft uncertainty made the market nervous," she says. As a result, the NASDAQ high-tech stock market started dropping in April when U.S. District Judge Thomas Penfield Jackson ruled against the technology giant. Separate from that, Robbins adds, the profitability of technology companies is slowing as they come out of the bubble of fashionability.
The question economists such as Robbins are asking is whether the U.S. economy is heading for slow growth (soft landing) or a recession (hard landing). "The markets aren't giving a lot of comfort," she says.
Indeed, analysts are hinting that the slowing economy runs the risk of turning into a hard landing. There is a slim chance of a recession in the second or third quarter, Robbins warns. "What has powered the economy in the past was the high-tech sector," she explains. "We have come to depend on it to do well. If there has been some damage done to the tech sector, it could damage the overall economy as well."
Some industry insiders fear that the mere mention of the "R" word by Bush or Vice President-elect Dick Cheney runs the risk of triggering a self-fulfilling prophecy. Robbins disputes that theory, which she refers to as "the announcement effect."
A $1 trillion-plus economy won't turn for the worse on the words of one person, she says, even if he is the vice president. For that to be the case, "there already had to have been doubts."
Bush and Congress are expected to use tax relief to fortify the wobbly economy that, in the final tumultuous days of the Clinton administration, is greatly in need of steadying. The most likely solutions, according to one GOP congressional aide, are reduction of the death tax and elimination of the so-called "marriage-penalty" disparity between what taxpayers pay as single individuals versus what they must pay as a married couple.
Those two proposals are expected to come before the House Ways and Means Committee "first and quickly," according to a staff aide. And even as the Electoral College was convening in state capitals nationwide, Bush was glad-handing his way through Washington, making bipartisan overtures for legislative and Federal Reserve cooperation. The bemused GOP staffer notes that Bush's well-publicized knack for reaching across the political aisle to seal consensus for his agendas "will send [Senate Minority Leader Thomas] Daschle [of South Dakota] and [House Minority Whip David] Bonior [of Michigan] out of their ever-loving minds."
But there are early hints that currents of hidden agendas flow under the placid surface of bipartisanship. Bush's presence does change the political environment, concedes a Democratic staff aide. In the past, Congress' GOP leaders' message to Democrats was "our way or no way."
As a result, the perception of congressional Democrats was that GOP proposals were aiming for President Clinton's veto pen, in order to make the proposals hot-button campaign issues. "Now they're likely to want something enacted," according to the Democratic aide.
But what tax proposals congressional Republicans can sell to their Democratic counterparts may depend on what the economy is doing. "There is no reason why we can't be productive" in the upcoming Congress, the Democratic staffer says. "All they have to do is bring in the Democrats" - during the planning, writing and negotiating.
The clear indication, which the aide confirms, is that Democrats will want another crack at the marriage-penalty and estate-tax proposals that passed the House and Senate during 2000. Their attempts at input in planning and consultation for the previous bills roundly were ignored. Attempts to send similar proposals to a newly elected President Bush "will have to include Democrats in the decision-making," according to the aide.
Similar cooperation can be had on other bipartisan proposals that failed in the past Congress. The staffer speculated that Democrats also could be open to proposals for a new minimum wage, small-business tax relief, prescription-drug proposals and closing corporate tax loopholes. "I'm neither optimistic nor pessimistic" about whether the new spirit of bipartisanship will be lasting, say the Democratic staffers. "It's really up to him [Bush]."
So until the new administration's budget is presented, Capitol Hill is waiting to take its cue from the legislative agenda of the president-elect. His economic adviser for the campaign, Lawrence Lindsey, is expected to be chosen to chair the National Economic Council. House Ways and Means Committee members are expected to sit down with Lindsey and Bush's Treasury-secretary appointee, Alcoa executive Paul H. O'Neill, to devise a strategy for legislation that will help stave off a potential economic downturn.
Meanwhile, fierce political competition continues in another venue as congressional leadership posts are being decided. Key among them is who will lead the powerful House Ways and Means Committee, from whence all tax legislation is hewn. The new chairmanships are expected to be announced in early January.
The Bush tax plan was designed as a short-term stimulus or a long-term growth-enhancing mechanism, the unnamed GOP staff aide points out. So far Bush is resisting urgings that he renege on his call for a $1.3 trillion, across-the-board tax cut. And, according to Ways and Means spokesman Duffy, Bush may not have to abandon his tax-relief promise.
Federal Reserve Chairman Alan Greenspan has opined that surplus money should be prioritized first for national-debt reduction, second for tax relief and last for additional government spending. The last two omnibus bills enacted have confirmed Bush's allegations that a Congress that does not use budget surpluses for tax cuts will spend it instead. Duffy wonders whether the lack of fiscal restraint to focus on debt reduction will cause the Fed chairman to soften his resistance to Bush's tax-relief proposal.
Duffy's unnamed GOP colleague meanwhile suggests that decisions also will have to be made about whether tax-relief proposals should address minor items that bedevil millions of individual taxpayers or go after mind-numbing provisions that confound the considerably smaller population of business taxpayers. But no compelling movement exists to fix business tax problems first, the staff aide says. |
