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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.
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