By ROBERT B. REICH
President-of-the-U.S.-Economy Alan Greenspan has cut interest rates, but President-elect Bush says it’s not enough. W. wants that whopping tax cut he ran on to stimulate the economy further.
Look behind the headlines and here’s the reality: Greenspan is offering Bush a deal, but Bush won’t buy it. Worse, Greenspan can’t punish Bush for not dealing. He can’t even credibly threaten punishment because punishment is just what Bush wants. Don’t throw me into that briar patch, Br’er Greenspan!
The last two presidents have been willing to strike a deal with Greenspan. Bush the Elder struck it too late, of course. Greenspan began raising short-term interest rates in 1988, at the start of Bush’s presidency, and squeezed until the Elder cried uncle. Bush finally agreed to hike taxes, despite what the public had read on his lips. But by then, growth had stalled and unemployment had shot upward. Bush was kicked out of office by an electorate worried about the economy, stupid.
When Bill Clinton was elected, Greenspan made the deal explicit: You saw what I did to Bush, he said. I could do the same to you, and you’ll be another one-term president. Alternatively, you can take my deal right away. Forget your giant $50-billion-a-year plan to invest in schools, training and health care. Cut the deficit instead. Raise taxes and squeeze spending so that the deficit shrinks. In return, I’ll reduce interest rates. And when I do, the economy will boom, and you’ll be reelected in 1996.
Clinton took the deal, and the rest is history. The economy expanded. The stock market soared.
Unemployed dropped. True, most Americans didn’t get much out of the booming ‘90s. Median income rose a tad, largely because the typical American family put in more hours of work. And the bottom 60% of earners ended up with lousier schools and less health care. But, hey, most Americans stopped worrying about the economy. Every year of the Clinton presidency, Americans spent more than they earned. Consumer optimism reached record highs, as did consumer debt and stock market valuations.
So now we’re at the start of another presidency, and Greenspan is once again offering a deal. His offer to
W. goes like this: Mr. President-elect, give up your silly tax cut. You don’t have a prayer of getting all of it through Congress anyway. Tell the public you weren’t really committed to it. They’ll forgive you, of course. They didn’t much care about it, actually. Remember: Bill Clinton gave up his investment plan and got reelected; you can give up your tax cut and suffer no political consequences.
Give it up, Mr. President-elect, and in return I’ll keep the economy moving forward. I’ll slow it down, but I won’t put it into recession. I’ll just take it down gradually. You see, it was getting out of control too much consumer debt, too much irrational exuberance on Wall Street. It had to be slowed down. That’s why I raised rates six times beginning in May 1999.
If it slows down too quickly, I’ll give it more throttle. That’s why I cut the rate by half a point Jan. 3. I’ll cut even more if need be in order to pilot a nice soft landing. Trust me, Mr. President-elect. I can bring this baby down safely and keep it moving forward.
Here’s what Bush is saying in response: Alan, you’re an impressive guy. I respect you. I harbor no grudges for what you did to my dad. But Alan, no deal. I’m gonna try to get a whopping tax cut anyway. See you in the recession.
Bush won’t deal for three reasons. First, he knows that presidents don’t get reelected on soft landings. The most important thing in the minds of voters come election day isn’t how bad or how good the economy is, but the direction it’s heading. A soft landing is still a landing. That’s no help in 2004.
Bush actually wouldn’t mind a recession in 2001, because a hard landing this year increases the likelihood that by 2004 the economy will be taking off again. A hard landing in 2001 gets the worst out of the way early in Bush’s administration. It would squeeze out the excess consumer debt and the air still left in Wall Street’s bubble, clearing the way for a sharp recovery. It spares Bush the fate that befell his father in 1992, when the Elder failed to bring his recession to a close well before the election.
An economic stall in 2001 would also allow Bush to blame it on the Clinton administration, which, he’ll say, failed to cut taxes to keep the economy growing. And finally, it gives Bush a rationale for the tax cut he touted during the election campaign. Now, he says, it’s needed to stimulate the economy back to robust health.
This is the reality that has Wall Street quivering despite Greenspan’s recent rate cut. W. won’t deal. He’s looking forward to the briar patch.
Robert B. Reich, Former U.S. Secretary of Labor in the Clinton Administration, Is the Author, Most Recently, of “The Future of Success,” Published Last Week by Alfred A. Knopf
Copyright 2000 Los Angeles Times
October 14, 2002