It's conventional wisdom that Democratic leaders accepted President Bush's plan for a pre-election vote on Iraq because they wanted to be able to return the nation's attention to the ailing economy before midterm elections Nov. 5. But the Democrats' failure to present a vital economic policy of their own has crippled their strategy.
It's true that Bush and his economic advisors don't want the election to be a referendum on how they've handled the economic downturn. Because the answer is: abysmally. Bush's proudest economic achievement since he took office, his $1.35 trillion tax cut, placed more weight on an already fragile house of cards. History will not be kind to it. The 1980s and 1990s saw the greatest accrual of private wealth since the robber barons; this president decided to give the rich even more money.
But fairness isn't the only reason the tax cut was ill-advised. As an economic remedy, it won't work for three reasons. Most of it won't kick in until far into the future, too late to help us out of the current slump. It puts the vast majority of the money returned into the hands of the wealthy, even though a tax cut targeted to the poor, working and middle classes makes more sense, since those groups are more likely to stimulate the economy by spending what the government foregoes in taxes. And, of course, the cut portends federal budget deficits as far as the eye can see, which is disturbing investors who often base decisions on prospects in the longer run.
Now, as the economic bad news continues, Bush refuses to acknowledge the threat. While the president focuses on Iraq and terrorism, the lack of national economic leadership is making consumers, businesses and investors nervous. The prospect of war with Iraq is also seriously depressing investor and consumer confidence. Meanwhile, Bush hasn't introduced any type of economic rescue or stimulus package to Congress. But, so far at least, Bush hasn't had to address the economic crisis, since he has paid almost no political price for his failure to do so. And for that, the Democrats have only themselves to blame.
The best thing the president has going for him politically, in terms of deflecting attention away from the sagging economy, is the embarrassing timidity of the Democrats. Watching them this year has been like watching a great veteran hitter strike out again and again on a bad pitch: His reflexes may have slowed slightly, and the press keeps telling him that he is past his prime. His coaches keep telling him to shorten his swing. But clearly his real problem is confidence.
The Democrats have been listening too well to both the press and their "coaches" -- specifically, the "New Democrat" advisors who have proudly taken a page from the Republicans and Alan Greenspan. The bad pitch they can't resist is the notion that Americans want tax cuts, at almost any price. Many Democrats now believe that social programs are a perhaps-necessary evil that will always drag the economy down because they drain money from capital spending. And they think it's political suicide to call for rescinding the long-term Bush tax cuts for the wealthiest Americans: Even a newly energized Al Gore refused to take that stand in a recent speech at the Brookings Institution. Sen. Ted Kennedy has been one of the few prominent Democrats to stand up and demand at least postponement of the cuts, but these days the party considers him too far to the left.
In fact, the big Bush tax cuts hurt the economy, and some types of social spending would help it. Increasing selective social spending would do two important things at once: Help the overall economy and protect American families from the worst impacts of this slowdown. With Republicans and Democrats both steering away from this approach, you're not hearing about it in many political stump speeches as we approach Nov. 5, but you should.
It's clear the economy is not going to revive from its torpor any time soon. Gross domestic product, which started falling in the spring of 2001, started to rise modestly this spring, but now looks to be weakening again. The labor market has not revived. The number of jobs in the economy fell substantially for a year, and has now remained about flat. Most telling, the number of employed has fallen as a proportion of the population for well more than two years, the longest such decline in the past 50 years. That means people are leaving the work force in droves, but are no longer counted as unemployed. The rise in the unemployment rate, up 2 points since early last year, actually understates the labor market's weakness. And foreign economies are weakening, too, providing less demand for the nation's exports. The trade deficit -- the excess of imports over exports -- hit another monthly record in August.
The list of negative indicators is long. Stock prices have fallen faster than at any time since the legendary bear market of the early 1970s. Earnings are weak. The deficit keeps rising. Capital investment is not likely to come back. Many of the nation's economic gains stemmed from the famous rise in productivity -- output per hour of work -- which had a lot to do with computer technology and investment in that sector. It's unlikely to continue -- recent productivity increases have more to do with aggressive layoffs and staff reductions than long-term strength, but new-economy advocates cling to it as proof that the stage is set for another boom. And it isn't. Another dip may be more likely than a boom any time soon.
Against this backdrop of economic gloom, it increasingly appears that no one is at home in the Bush administration when it comes to these issues. Treasury Secretary Paul O'Neill has been tone-deaf to domestic and international economic concerns. He dismissed the Enron scandal as capitalism at work and downplayed what someone in his position could do to make a difference. By contrast, Clinton administration predecessor Robert Rubin -- like him or not -- played a large role in smoothing over tough financial times, including the Asian financial crisis of 1997. His other economic advisors, hearty laissez-faire advocates who always enjoy a good excuse for government inaction, aren't taken seriously.
Some energetic Republicans have tried to blame the problem on President Clinton. But if you had to pick a single culprit from the 1990s boom to blame for the current economic sluggishness, it wouldn't be a Democrat, anyway. The more appropriate candidate is long-time Republican Alan Greenspan, chairman of the Federal Reserve, who fanned the speculative bubble with exaggerated claims for the new economy and refused to take any actions, such as raising margin requirements, to dampen trading. Greenspan's support was also critical in getting the Bush tax cut passed.
That's not to say President Clinton deserves no blame for the current troubles. His administration did not fight for new regulations to control accounting and finance excesses. In fact, it mostly supported legislation that made conflicts of interest in the financial community more likely. Even in the wake of the disgraceful failure of Long-Term Capital Management, the enormous hedge fund, the administration proposed no new regulations. And under the guidance of Rubin and his successor, Larry Summers, it simplistically promoted liberalizing capital flows around the world, which contributed to various foreign financial crises in 1997 and 1998.
Most significantly, the Clinton administration did not use either the political or economic capital it accumulated during the boom years to argue for greater social investment -- which would have served to protect American workers and families from the severity of this latest downturn, as well as protect the resilience of the economy itself. The Democrats under Clinton trumpeted the "unprecedented prosperity" of the late 1990s, even as 40 million people lacked health insurance and America could boast of the highest child-poverty rate in the developed world (though child poverty did decline under Clinton).
Nearly half of American men saw their incomes fall over a 20-year period, even with the improvements of the late 1990s. In addition, many middle-income families lost economic ground thanks to education, drug, and healthcare costs that rose three and four times faster than typical incomes. Much of the household prosperity of the boom years had to do with spouses working in higher numbers and at longer hours, without the benefits of high-quality day care -- let alone government-supported day care. And while many women found individual independence through work, even some formerly on welfare rolls, others, especially the less-educated, worked in poor, dead-end jobs, made less than males in the same jobs, and frequently had to work part-time for lack of full-time opportunities. Although the Clinton administration did preside over a quiet transfer of income through a big increase in the earned income tax credit, some college funding programs and other programs, it used stealth to accomplish its greatest victories. Clinton was afraid the Democrats had shed the "tax and spend" smear too recently to risk making the economic case for greater social spending head-on.
But he was wrong. As I argue in "Why Economies Grow: The Forces that Shape Prosperity and How to Get Them Working Again," social programs can be critical to economic growth. Under the sway of ever more conservative economic and political leaders, we have forgotten that growing demand is as much an engine for long-term economic growth as technology or savings. And much-maligned social programs -- unemployment insurance, Social Security, the earned income tax credit and other types of public investment -- are critical to maintaining strong demand by fostering greater income equality. Increasing the minimum wage will also put more dollars in the hands of consumers. My biggest regret about Clinton is that he didn't use his formidable intellect and political skills to make that case to the American people.
President Bush, of course, is ideologically opposed to remedies that might address either the problems of the boom years, or of the recent downturn. And without the boom, many will say now is not the time to dramatically expand social programs. But what's striking is the extent to which the president has managed, with the help of timid Democrats, to forestall debate on what sorts of spending we can and can't afford, and which types of programs hurt or help the economy.
The president clearly follows three basic political rules. First, never admit a policy is wrong. Second, never show disloyalty by firing an appointee. And third, always claim the other guys are playing politics. None of the three are doing anything to improve the economy, but so far at least they've worked politically. Bush managed to retool his tax-cut proposal -- which he floated during the 2000 campaign as the way to spend the surplus that accumulated during the boom years -- as a remedy for the downturn. This is economic policy by accident, but he got away with it. Two years later, his only answer to the protracted economic slump is still more tax cuts -- not for workers, mind you, but for investors and business. But it won't work.
While some Republicans try to claim that tax cuts set the stage for America's boom in the 1990s, they're clearly wrong. The first big round of tax cuts, under President Reagan, took place in 1981, and the economy did not embark on sustained growth until 15 years later. It hardly seems like provable cause-and-effect, but tax-cut supporters are undeterred by the time lapse. Likewise, some argue that the capital gains tax cuts of 1997 caused the stock market boom, which increased federal tax revenue, but that's disingenuous. New-economy talk and dot-com fever were reaching their heights. Profits soared. Meanwhile, the Federal Reserve stepped on the monetary throttle hard in 1997 and 1998 to compensate for the international finance crises in those years. These are the factors that drove the market higher, not a capital gains tax cut.
In fact, the nation grew most rapidly in the 1950s and 1960s, when tax rates were much higher than now -- indeed, that growth was even faster than growth in the late 1800s, when tax rates were meager. Clinton raised taxes on the rich in 1993, and the economy took off within the next two years -- it might have done so sooner had Greenspan cut interest rates that year. And clearly, no one raised the capital gains tax in 2000 -- and yet stocks fell, and federal tax revenues with them.
So what's the answer now? Clearly the problem is not high taxes. One main problem is that business overinvested in high-technology equipment in the late 1990s, and we are not going to see aggressive business investment any time soon. A nation, indeed a world, with too much capacity to produce goods and services is not likely to see tax cuts for business and the wealthy succeed in restoring capital spending. We do not need tax cuts, as one businessman told me. We need people buying the products of American businesses.
Unemployment is one obstacle to such spending. Another obstacle is the high levels of debt consumers took on in the 1990s. Consumers have kept purchasing anyway, but the question is whether they will keep it up. If people fear they will lose their jobs, they are likely to cut back. GDP has to grow by 3 percent a year to produce a net gain in jobs. Few think it can do more than hobble along. The fall in stock prices is serious grounds for concern that the bottom could just fall out. And now housing prices may fall, too. (In some regions, like the technology-dependent San Francisco Bay Area, they've clearly begun to drop.)
Only a targeted package of social spending -- including some tax cuts for the working and middle class -- is reliably going to spur the economy. America needs a serious short-term fiscal stimulus. Congress should extend unemployment insurance, send money to newly cash-strapped states to keep up their health, education and welfare spending, and rescind the Bush tax cuts for the rich. A payroll tax cut for real working Americans could then be adopted, to promote spending now. These Social Security and disability taxes fall disproportionately on middle- and lower-income workers.
The components of an effective short-term stimulus plan are fairly simple. So it's dispiriting not to hear more Democrats talk about them. House Minority leader Richard Gephardt has offered a plan to increase social spending, but also to cut as yet unspecified taxes for middle- and lower-income workers. Yet he refuses to support rescinding the Bush tax cuts on high-income Americans, even though they weaken the economy. Other Democrats, such as Teddy Kennedy, are supporting specific programs to expand unemployment insurance and raise the minimum wage. But there is no other broad plan to rescue the struggling economy.
Ironically, war and homeland security spending are helping to keep the economy from sinking. But it is unlikely that war spending will be sufficient stimulus to offset the spike in oil costs a war with Iraq almost certainly would trigger. And the high levels of public uncertainty, even fear, that would accompany such a war could very well keep stocks from rising, people from buying, and business from investing. The nation needs to invest in new demand directly, not merely as a byproduct of spending on war or national security.
And in the long run, we need to change the way voters and politicians understand economic tradeoffs. We need to balance the very real concerns over high federal deficits and inadequate American savings rates with the competing need to support a strong domestic market and economic equity. Savings will matter over time, but they cannot be emphasized to the exclusion of higher wages. Long-term deficits can be a drag on the economy, but short-term, targeted borrowing can be a stimulus. Free trade may be helpful, but domestic demand matters more.
Over time, we must address issues that the Bush administration simply won't. Inequality must be targeted through expanded earnings tax credits, fairer welfare programs, a higher minimum wage, and efforts to root out the lasting effects of racial discrimination. One tragic lasting effect is the inequality and inadequacy of public education. Our tradition of locally funded K-12 schools has consigned poor children, disproportionately black and Latino, to crumbling buildings with poorly trained teachers and low standards, while wealthy suburban kids who start with every advantage get much more. Smart investment in education, preschool, day care and healthcare pays off in so many ways: By creating jobs to provide those services, we put dollars in the hands of people who'll spend them. And by providing those crucial services, we develop a workforce that gives the nation a lasting competitive advantage that cannot readily be undermined by low-wage competition.
What is remarkable is the way we recoil from such an agenda. Yes, public spending can go too far. Yes, some Great Society programs were ineffective, inefficient and lacked accountability. But we have swung too far in the other direction. And even after eight years of prosperity under a Democratic administration, we could not revive the ideal of equity alongside economic growth, or make the case that one can lead to the other. It may be harder to make that case under a conservative Republican administration, and during an economic downturn. But we have no choice. Both fairness and the need to begin the economic recovery require that we begin soon.
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