The Economic Blame Game

The economic blame game is now in full swing, with President George W. Bush, Bill Clinton and Alan Greenspan all accused of causing the economy's troubles. Although none is guilty, the game will continue, because the major players (rival politicians, the press, TV talking heads) can't admit that it's an exercise in make-believe. The premise is that our leaders can control business cycles and prevent the bad stuff, higher unemployment and lower stock prices. The trouble is that they can't.

If you ignore that, then all the indictments sound plausible.

Let's start with Bush. He is, say critics, demolishing confidence. His tax cut has obliterated the budget surplus. Chummy with big business, his administration has been insensitive to corporate crime. Finally, his economic advisers, led by Treasury Secretary Paul O'Neill, are nincompoops. The rhetoric is great; the logic isn't.

Whatever its vices, the tax cut didn't cause the recession. Indeed, it helped check the slump. The first parts of the tax cut (a drop in the lowest rate to 10 percent, a bigger child credit) aided the middle class. The White House says that by the year-end the tax cut will have saved 800,000 jobs. Even if the estimate is high, its direction is right. In a weak economy, the government ought to run a budget deficit. Interest rates haven't suffered. Thirty-year mortgage rates are near 6 percent, the lowest levels since the late 1960s.

As for corporate crime, most abuses started before Bush's election. How can he honestly be blamed? It's true that O'Neill & Co. don't project well. But do people consult the Treasury secretary before buying a car or home? Apparently not. Home buying and car buying remain strong.

Well, let's blame Clinton. Here, too, the superficial case seems strong. First, there's timing. The stock market peaked on Clinton's watch, in March 2000. Worse, the latest revised government statistics (released in July) show that the economy's gross domestic product dropped for the first nine months of 2001. It takes a highly partisan view to think Bush's election triggered a recession. At the time, Bush and Vice President Dick Cheney said the economy might be in recession. The new statistics prove they were right.

Next, there's Clinton's big mouth. Overwrought rhetoric (a.k.a. hype) inflated the stock-market bubble, and no one talked up the economy more than Clinton. People who correctly dismiss last week's White House economic forum as a publicity stunt may recall Clinton's similar conference on the New Economy in April 2000. The country, he said, was undergoing an "economic transformation as profound as that [of ] the Industrial Revolution"--a breathtaking simplification that skipped over the automobile, the airplane and TV (among others), whose transforming effects dwarf the new information technologies'.

But Clinton can't be blamed for the economic bust unless he caused the preceding boom--and he didn't. It rested on two pillars: low inflation and high business investment, mostly in computers and telecom equipment. Suppose Bob Dole had won the 1996 election. Would inflation have been higher? Doubtful. Would investment have been lower? Doubtful. The person in the White House hardly affected the economy's main driving forces. And Clinton's blab didn't matter either, because hype gushed from so many other sources: the press, stock analysts, various New Economy prophets.

None of this means presidents are economically irrelevant. Ronald Reagan appointed Greenspan as chairman of the Federal Reserve Board; Bill Clinton reappointed him. Greenspan's stewardship helped repress inflation. Through regulations, taxes and spending, government can help or hurt the economy. With hindsight, mistakes in deregulating the telecommunications industry contributed to the industry's boom-bust cycle--first overinvestment, then collapse.

But what presidents and government can't do is guide the economy along a path of trouble-free prosperity. The job is too large; the pressures on the economy are too many; the government's tools (taxes, spending programs, interest rates, regulations) are too few. The growing criticism of Greenspan presumes that he and the Fed can accomplish this wondrous feat.

Greenspan has made mistakes. He, too, overpraised the New Economy. In early 1999, the Fed may have kept interest rates too low, contributing to stock speculation. But the Fed was then trying to prevent a recession stemming from Asia's financial crisis and Russia's debt default. Its success bolstered the growing mythology that the Fed is all-powerful. This mythology--more than low interest rates--fed speculative behavior.

No one and everyone is to blame for the present economic letdown. A speculative boom, once started, cannot end gracefully. Prices that went to unrealistic heights must collapse. There must be casualties. All who participated in this process bear responsibility--an unpopular verdict. Instead, the blame game will continue, because its players enjoy it, there is an eager audience and hardly anyone cares about the harsher truth.