Be afraid, be very afraid. That has been the message of President George W. Bush and his economic team ever since December, when they realized that for the first time in 112 years they couldn't use the normal argument of new presidents to push their program. Invoking "the will of the people" wasn't going to cut it this time.
So they did something risky and unusual--they poor-mouthed the economy to build support for their tax cut (which, as currently designed, would have almost zero impact on the economy this year) and to sprinkle a little blame for any recession on Bill Clinton. Even if Bush turns out to be right in his predictions of gloom, that doesn't mean he was right to make them. Not "prudent," as his father might say. Not helpful.
Yes, the power of any president over the economy is often exaggerated. This latest slowdown began last fall and was probably inevitable. The tech-stock bubble inflated and burst without much influence from Washington. But if the origins of economic trouble cannot be blamed on a president, the way it spreads psychologically is very much within his job description, if for no other reason than that the American people believe it to be. Consumer confidence is central to any soft landing (or, in the case of real recession, any recovery), and that confidence can be bolstered or eroded by the man in the White House.
Until last week, confidence in the economy remained high by historical standards, and for good reason. Despite a plunging Nasdaq and signs of weakness in manufacturing, the fundamentals--low inflation, strong job growth, strong productivity--have stayed sound. But confidence in the future of the economy has been falling sharply since the beginning of the year. Why? What conditioned the public to be so bearish this year when we've weathered bigger market corrections before?
Part of the explanation is that many Americans figure we're overdue for some tougher times. Nothing lasts forever. But leadership, especially when it's new and more credible, still counts. Only days after Bush prevailed in the Supreme Court, Vice President-elect Dick Cheney said on TV that we were at "the front edge of a recession." (Even now, that is highly debatable.) Bush himself could hardly open his mouth in his first weeks in office without talking about a "sputtering" economy whose growth has "stalled."
Last week I followed the president to East Brunswick, N.J., where, starting to worry about the weight of his earlier words, he insisted he had "great faith in the future of the economy." Now Bush is entering deeper rhetorical waters, where every phrase will be parsed as if he's Alan Greenspan. He's gone from saying the economy is bad when it wasn't so bad--to saying it's good when it isn't so good.
And the logic of the Bush economic plan has taken an Orwellian turn. Let's see now: we can afford to lock in a huge tax cut over 10 years because the economy is strong and producing huge surpluses. But we need a huge tax cut because the economy is weak and cannot be depended on to produce those surpluses. Which is it?
Meanwhile, most of the Bush cuts don't take effect until 2006, long after they can have any impact on current conditions. Even with the retroactive provision, a paltry $6 billion would go back to the tax- payers this year, not enough to kick-start a motorbike in an economy as big as ours. The GOP majority in the House apparently decided to overlook that slight detail when it passed the tax plan this month intact, but the Senate is already balking.
As for who gets the loot: at first, administration officials tried to deny that more than 40 percent would eventually go to the top 1 percent of taxpayers (including an average of $4 million each for the 400 richest Americans). When that didn't fly, Bush unveiled a new argument, insisting that the tax cut for the wealthy was the only way to encourage the entrepreneurship necessary for recovery. He neglected to mention that the vast majority of small-business owners incorporate (for liability and tax reasons) and thus their businesses wouldn't be affected by personal-income-tax cuts. Then there's the inconvenient fact that the greatest period of entrepreneurship in American history--the 1990s--came just after a sharp increase in income taxes at the top end. So much for supply-side economics.
Speaking of which: the tactical model for the Bush Bears is 1981, when newly installed Reagan aides declared an "economic Dunkirk" (for those who need a refresher on their World War II history, that means an emergency) to build support for their budget and tax cuts. But 20 years ago unemployment and inflation were near double digits and interest rates approached a ghastly 20 percent. Poor-mouthing the economy was simple honesty then. With things so much better now (today's unemployment, inflation and interest rates are in the 5 percent range or below), pessimistic prophecies actually carry the risk of self-fulfillment.
Obviously some kind of tax cut would help stimulate the economy now. Lots of alternatives are floating around, but most are too complex for fast action. The exception may be a $700 billion cut sponsored by Sens. Bob Graham and Jon Corzine that cuts the bottom rate from 15 percent to 10 percent on the first $19,000 in income, rebating nearly $1,000 to every American family as early as this summer. This is a Kmart cut that could actually give the economy a little jolt. "It's simple, speedy and substantial," says Corzine, who knows a thing or two about the economy from his years on Wall Street. It's also sensible, which in today's climate means it probably won't pass.