Government Fiddles and the Economy Burns
Government Fiddles and the Economy Burns
RICHARD W. STEVENSON . NY Times . 16 december 2001
IN the real world, as this recently fat and happy nation has learned once again, the economy can change with distressing speed. Hundreds of thousands of jobs disappear in a month. Confidence and stock market gains evaporate in a blink. Companies whose strategies appeared brilliant are exposed as overreaching, or even fraudulent, the moment times get tough.
In the political economy, however, nothing ever seems to change. Republicans insist that, whatever the question, the answer is tax cuts. Democrats demand help for the little guy, often invoking class warfare in the process. Lobbyists tailor their pleadings to the climate of the day, and members of both parties sidestep principle to help or protect favored interests back home.
Such predictable clashes of ideology, combined with the pursuit of parochial interests, all but ensure that political leaders in Washington will respond in slow motion if they respond at all to the fast- forward blur of a deteriorating economy.
So it was that Congress and the Bush administration were still haggling over an economic recovery package last week, even as the Federal Reserve cut interest rates for the 11th time this year and some private economists began seeing signs, albeit tentative ones, that the recession may be entering its final stages.
But though they may run at different speeds, politics and the economy are inextricably intertwined. And as they confront this downturn, however haltingly, Democrats and Republicans are facing the likelihood that the hopeful possibilities glimpsed in recent years of paying off the national debt, shoring up Social Security, helping the elderly bear the rising costs of prescription medicines may have vanished.
Whether this recession fundamentally alters the politics of the economy depends to some extent on how long it persists. An outbreak of Japanese-style deflation in the United States, or a long and costly war on terrorism, would change the terms of the debate. But even if the future proves less dire, the changed situation already holds implications for everything from the 2002 elections to the ability of the nation to get its finances in order for the aging of the baby-boom generation.
Assuming that they complete a deal on a stimulus bill that includes tax cuts and additional benefits for the unemployed by no means a certainty Congress and the White House could have a substantial effect on the strength if not the timing of the recovery. While many analysts expect the downturn to end by spring, there is considerable debate among economists about how robust the rebound will be, with some forecasters projecting tepid growth and others seeing a boomlet.
In political terms, both parties are positioning themselves for an election-year battle in 2002. They have rediscovered their inner Keynesians, eagerly seeking new spending (Democrats) or tax cuts (Republicans), while arguing over who lost the surplus. Democrats blame President Bush and his big tax cut. Republicans blame an economic slowdown that started when Bill Clinton was still in the White House, and big-spending Democrats in the Senate.
Either way, the agendas of both parties will be severely constrained in coming years by the lack of money on the table. More broadly, the combination of recession and war is forcing both parties to rethink the relationship between budget policy and the economy.
The Social Security lockbox, the centerpiece of that relationship for the past few years, was shorthand for a commitment that the bulk of the projected surplus, the portion coming from the retirement system, go only to reducing the national debt.
It had an economic rationale: that reducing the debt would give the nation more financial flexibility a few decades from now when the aged baby boomers place a huge strain on the social welfare system, and in the meantime would help bring down long-term interest rates, spurring more growth-enhancing investment by businesses and consumers alike.
But debt reduction was always as much a political concept as an economic one, adopted by the two parties as a way of keeping each other from getting their hands on what seemed at the time to be limitless surpluses.
It also proved to have great appeal to voters, who seemed to feel virtuous that the government was paying for its profligate past even as they were running up record levels of consumer debt and driving down their own savings rates to near zero.
The popularity of debt reduction also muffled the traditional ideological arguments about how best to encourage long-term economic growth, which in any case didn't seem to be much of a problem.
WITH unemployment at record lows, Democrats had a hard time making the argument that more government spending on education, health care and transportation would yield a payoff in the form of a more productive work force and a more efficient economy. And until Mr. Bush's election, when the projected surplus was so big that the biggest tax cut in a generation could be portrayed as fiscally responsible, Republicans had little success selling their idea that cutting taxes would generate more investment and create more jobs. They were able to sell Mr. Bush's tax cut only by promising that there was still plenty of money for debt reduction an assertion that now is likely to be proved false.
Robert B. Reich, a liberal Democrat who was labor secretary in the Clinton administration and is now considering running for governor of Massachusetts, said the current fiscal troubles and the disappearance of the lockbox are an opportunity to re-engage a vigorous debate between the left and right on economic policy.
"The right would say you need tax cuts to generate incentives for the wealthy and companies," he said. "The left of center would say, what about public investment? If you don't have good education and healthy people and a good transportation system, you can forget about productivity improvements in the future. The chances of having that debate now are higher than when we were locked into the silly debate over the Social Security lockbox."
Those arguments, from both left and right, will still have to compete with the case for debt reduction. Paying off the debt resonated with voters not only because it was easy virtue, but because this is a nation of homeowners and credit card holders who are well aware of how rising interest rates bite into their wallets.
Of course, the whole notion of debt reduction hinges on the existence of surpluses, and there are credible studies circulating on Capitol Hill that show nothing but deficits for the next decade. Having sold the nation on fiscal responsibility, politicians could now have a difficult time explaining why it is no longer possible and how the opportunities it yielded got away from us.