Do-Re-Mi
"Believe it or not, you won't find it so hot, if you ain't got the do-re-mi." - Woody Guthrie
Economically as well as militarily, leaders are always fighting the last war. Those that succeed are the ones who manage to adjust their expectations and modes of operation to fit the new model. Those who doggedly stick to unsuitable strategies get overrun. Bill Clinton clearly came into office wanting to be FDR or LBJ, but ended up having to settle for being Calvin Coolidge, at least economically-speaking. George W. Bush had visions of being Ronald Reagan - not the real Reagan, but the Reagan that right-wingers see through the rosy fog of history. Turns out he's the one who needs to be FDR, but he's walking and talking a lot like Herbert Hoover.
The Bush economic strategy is pretty simple: "Tax cuts are the answer. What was the question again?" Tax cuts are not inherently a bad idea. They worked in 1962, when an investment tax credit tipped off nearly eight years of sustained economic growth, and it could be argued that they worked in the early 1980s, although there was so much government spending at the same time that it’s hard to determine exactly what stimulated the economy more.
But, this is important, tax cuts of the kind Bush is proposing are effective only at the beginning of an economic cycle, when they can trigger pent-up demand for new capital investment. Right now, we have the opposite problem. Our capital plant was enormously overbuilt in the late 1990s. There’s too much capacity and not enough demand, and no amount of tax cutting is likely to alter the fundamental business environment under these circumstances. Companies aren’t reluctant increase spending because their taxes are too high – they’re not investing in jobs or equipment because there is no demand for their products and services.
At this stage of the economic cycle, increased public sector spending – even at the cost of high deficits – is what’s required. In this, Bush is likely to get much more economic traction out of his war-oriented foreign policy than his tax plan. Unlike tax cuts, which return money to corporations and individuals to use at their discretion, government spending does not need to “trickle down” – it is immediately stimulative. The only tax cuts that can serve the same pump-priming purpose are reduced taxes on consumption (primarily sales taxes, which are controlled by the states) or returning money to the segment of the population most likely to spend it rather than save or invest, which would be the lower-income segment. Bush’s tax cut, because it is political rather than economic in focus, does not address this problem. It was never intended to: it was a tax cut geared to the economic circumstances of the boom-years of the late 90s and is spectacularly ill-suited to the needs of the borderline-recessive climate we’re in today.
The Bush economic team continues to add fuel to the fire with their ill-conceived jobs strategy. Job retraining and welfare-to-work programs were the right idea in the growing economy of 1996, when unemployment was at historic lows. Right now, there’s not much sense in giving tax credits for people to invest in retraining themselves for jobs that don’t exist, or forcing millions off the welfare roles into an economy that can’t currently support workers with greater job skills and experience.
The mantra of welfare reformers is that the poor want jobs, not relief. Fine, but if there are no jobs, then the jobless need relief. It’s not just compassionate – it’s good macroeconomic policy. People with no income don’t spend much, so demand stays in the tank. No demand – no business investment – no jobs – no demand. That’s the recessionary spiral. Taxes don’t have much to do with it. Add in a little bit of global deflation and an oil supply shock and we’re talking 1931 all over again: Depression with a capital D.
Herbert Hoover’s stiff-neckedness in the face of impending economic collapse can perhaps be explained by his steadfast belief in conservative economic principles and his compulsive need to balance the budget. Deficit spending was a new idea in those days, and a risk-averse man like Hoover could not be expected to embrace it with any kind of enthusiasm. Bush, while no less stubborn, does not, to be charitable, have the intellectual commitment or actual policy experience of someone like Hoover. The strength of his views appears to be motivated less by economic principles than by political ones. In fact, his economic positions are nearly unintelligible without reference to the political subtext.
To the Bushies, restoring general prosperity is a secondary consideration behind restoring the prosperity of the right people. Bush and his supporters recognize that government spending may help the economy, but it will also empower Democratic constituencies, which is unacceptable. Republicans hated and still hate the Clinton boom because it improved the relative wealth, status and security of traditionally-Democratic minorities, urbanites and educated professionals – whose new clout threatened permanent harm to the interests of old-economy Republicans. Reversing that trend, even at the expense of jobs, market capital and general social well-being, is clearly seen as necessary to the continued survival of the conservative establishment. And given the choice between doing the right thing for the country and doing the right thing for the people who put him in office, Bush cannot help but choose the latter.
10:17:49 AM 
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