January
31, 2002, 8:00 a.m. Halfway
There
Bush
should do for the economy what he’s done for the war.
he
President gave a short and sweet State of the Union speech Tuesday night.
The three major themes of the speech were: the war on terrorism, homeland
security, and the domestic economy. President Bush was especially forceful
on the war on terrorism. He singled out North Korea, Iran, and in particular
Iraq as states who sponsor terrorism and are building arms of mass destruction.
If he meant what he said these countries should be concerned.
Apart
from the war-on-terrorism theme, the president argued for the replenishment
of some of the military inventory and the modernizing of some aging crafts.
He made the correct argument about defense. We need to spend enough to
insure our success. However, we should do this efficiently. Rebuilding
our inventory and adopting new programs does not preclude the administration
from discontinuing obsolete programs, even if they are located in certain
congressional districts.
The success of the
administration should be judged not only by what they fund but also by
what they do not.
The president outlined
a new series of spending programs that will go a long way to increase
domestic security and safety. Homeland security is clearly a new frontier.
President Bush was quite forceful and eloquent in describing the benefits
of the war on terrorism and an increase in domestic security. On the other
hand, he did not discuss the costs and/or the financing of the higher
spending. It is clear that the war on terrorism and homeland security
will lead to an increase in government spending — and that will put
pressure on other programs.
As for the domestic
program, what Bush laid out was disappointing. On the positive side he
asked for a stimulus package, trade promotion authority, and that the
tax cuts and the elimination of the death tax be made permanent. But the
big disappointment came in the way the president articulated his support
for the tax-rate cuts and the stimulus package. He sounded like a Keynesian,
not like a supply-sider.
Bush argued that
by putting money in people's pockets, they would spend more and that would
reactivate the economy. The problem with this logic is that if you buy
into it, an increase in government spending will work just as well. Higher
government spending will — all else the same — put more money
in people's pockets. The problem is that not everything else is the same.
The tax cut and/or higher spending, under the current budgetary conditions,
may require a reduction in some other spending. Those who lose will have
less money in their pockets.
In short, income
redistribution, even if intergenerational as a result of a budget deficit,
does not result in a net increase in aggregate demand. It would have been
lovely to hear the president make the argument that the tax-rate cuts
increase after-tax rates of return, and that in turn increases incentives
to work, save, and produce. That would have assured that the economy would
get back on the right track.
And while it was
nice to see Bush reiterate his support of private retirement accounts,
the Enron scandal seemed to have weakened his resolve against more government
regulation.
As for the war on
terrorism, it's easy to have the utmost confidence in Bush. But his economic
message does not instill confidence. Looking at how he has handled the
war on terrorism, it is evident that he has great instincts. He should
trust his economic instincts more and pay less attention to his advisors.
If he does this he will steer America into a virtuous cycle of economic
prosperity. Otherwise, we could end up with sub-par economic performance
and a one-term presidency.
— Victor
A. Canto and Peter Mork of La Jolla Economics
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he
President gave a short and sweet State of the Union speech Tuesday night.
The three major themes of the speech were: the war on terrorism, homeland
security, and the domestic economy. President Bush was especially forceful
on the war on terrorism. He singled out North Korea, Iran, and in particular
Iraq as states who sponsor terrorism and are building arms of mass destruction.
If he meant what he said these countries should be concerned.
