Bushed

On Friday afternoon—with the Dow off nearly 400 points on the day, a gigantic rise in oil prices, terrible unemployment numbers, and rumors of yet more losses at another large Wall Street firm—CNBC began flagging the fact that President Bush would speak publicly about the economy. At the swearing-in ceremony of Housing and Urban Development Secretary Steve Preston, Bush ignored the economic chaos and regurgitated his standard lines: he cited the passage of the stimulus package. He proposed greater domestic oil production—sometime in the next decade. "Congress needs to pass legislation that expands—that will allow for the expansion of American energy production." He offered tax cuts (or the avoidance of tax increases) in 2010 and 2011. "The last thing Americans need is a massive tax increase—so Congress needs to send a clear message that the tax relief that we passed will be made permanent."

Bush's inability to address the nation and the markets' economic anxieties should inspire as much pity as scorn. The ideas he offered are pretty much the same as those he's offered the last two years. With seven months left in a highly unpopular presidency, with Congress firmly in Democratic control, it's not clear President Bush actually can do much to relieve economic distress.

It's difficult to see precisely what could be done in the next seven months—what laws or stopgap measures could realistically be passed, implemented, and take effect—to alleviate the economic pain. After all, the powers that be have already done what they are supposed to do when credit markets seize up and consumer spending slows. The Federal Reserve has cut interest rates, taking the federal funds rate down from 5.25 percent to 2 percent in the space of seven months, a 62 percent reduction in banks' cost of short-term capital. (The Fed has also taken extraordinary efforts to pump credit into the system, by affording investment banks access to the discount window and by agreeing to accept mortgage-backed securities as collateral. Indeed, Federal Reserve governor Jeffrey Lacker last week said the Fed had gone too far in this regard.) To help strapped consumers, Congress and the president agreed on a package of tax rebates that are putting $120 billion of cash into the hands of middle- and lower-income taxpayers.

So far, neither of these textbook measures has worked—for reasons that have less to do with flaws in the design, time, and sizing of the policies than with global macroeconomic factors far beyond the control of the Federal Reserve or the White House. As we noted last week, there's a good case to be made that the stimulus is essentially being eaten up by higher gas and food prices—prices that are being driven higher in large part by a weaker dollar and strong global demand. And while lowering the federal funds rate has helped the crippled banking sector, it hasn't translated into substantially lower borrowing costs for consumers or companies. Mortgage rates are pretty much exactly where they were before the rate-cutting campaign began. The reason: in the aftermath of the housing and housing-related credit bubble, investors and lenders have resolved not to extend credit at too lenient rates. As for housing, while Washington generally snoozed through the first two years of the downturn, it's also difficult to see what Washington could do in the short term to make the massive 11-month housing inventory overhang magically disappear and reinflate prices to their bubble-era levels.

The economy today is being buffeted by a popped domestic housing bubble, which is deflationary; a global demand shock for food and energy, which is inflationary; and a credit crisis, which simultaneously inhibits consumer spending and makes capital more expensive. There's no effective short-term fix for any of these problems. By definition, anything that can be done between now and the end of the Bush presidency—a second, smaller round of stimulus, as Obama proposed today, or a summer gas-tax holiday, as McCain has proposed—would be largely symbolic and likely ineffectual. The $50 billion stimulus that Obama suggests would likely disappear into the same sinkhole of higher food and energy prices as the first. And virtually all economists agree that cutting the gas tax, as McCain advocates, wouldn't result in swift savings for consumers. Sure, it sends a better message than the course of action President Bush seems to be following: doing nothing. But the one piece of symbolic action Washington has taken thus far has been futile. In May Congress voted to order President Bush to stop filling the Strategic Petroleum Reserve. The theory: taking a source of demand from the marketplace would theoretically help lower crude prices. Bush complied on Friday, May 16. Since then the average price of a gallon of gas in the United States has risen by 23 cents.

© 2008