President Bush came outside the White House at 3 p.m. Friday afternoon to talk about the devastating job report published in the morning. The report had recession written all over it — including the highest unemployment rate in four years. Bush stood in front of the podium, flanked by House Speaker Denny Hastert and Senate Republican leader Trent Lott, and showed some Clinton-era “I feel your pain” in a discussion of the nation’s deteriorating economy. The trouble was, the president had nothing new to say.
Though both Lott and Hastert are proposing a capital-gains tax cut to lift business investment out of its doldrums, the president never once mentioned cap-gains. Instead, he repeated his mantra that the new budget under discussion must be disciplined, the so-called Social Security surpluses must not be invaded, and his energy plan should be passed.
Because he announced no new stimulus, stock markets sagged as the presidential news conference went on. No news is bad news as far as Wall Street is concerned.
The economic story is turning out far worse than anyone expected at the Fed or the administration. Stock markets are looking for some supply-side relief to lower the tax cost of production and investment, and improve incentive rewards for capital risk taking. But nothing is forthcoming in the way of new presidential policies.
One key reason for the lack of new tax initiatives is that top presidential advisors do not agree with Lott and Hastert. Treasury Secretary Paul O’Neill is travelling through the country telling folks that he doesn’t believe cap-gains relief will promote economic growth. Earlier in the year, he argued that corporations don’t adjust their planning on the basis of tax policy. Last week, he asserted that the nation cannot afford a cap-gains cut, despite decades of historical evidence that revenues rise when the cap-gains tax rate falls.
Top Bush economic advisor Larry Lindsey has not ruled out a cap-gains cut, but Lindsey continues to tout the consumer tax rebate as a demand-side measure to stimulate growth.
The Bushies are not entirely to blame for the policy stalemate in Washington. Leading Democrats such as Senate budget committee chairman Kent Conrad, lately joined by Sen. Hillary Clinton, have been ranting and raving about protecting Social Security surpluses. This time-tested Democratic Social Security scare tactic, normally reserved for the waning days of an election, has been hauled out in the middle of the worst stock market in nearly 20 years.
Daschle, Conrad, Clinton & Co. are arguing that declining budget surpluses are causing the economic slump. Factually, however, the true causality is exactly the reverse. You don’t have to be a supply sider to understand that it’s the slumping economy with fewer people working that is bringing down the surplus.
But there’s a way around this rhetoric. The Bush administration has to get to work by reaching out to Democratic tax cutters like Zell Miller and John Breaux to create a bipartisan coalition that will go behind the back of the Democratic leadership in order to rescue the economy.
Without a supply-side plan to promote capital formation and more generous equipment expensing allowances, stock markets will continue to rely on the next round of Fed easing for any relief. Incredibly, not a peep was heard from the central bank after Friday’s disappointing unemployment report. The Fed needs to drop its policy target rate by 50 basis points immediately, and then come back with another 50 at their next meeting in October.
Unfortunately, Washington continues to fiddle while the stock market and economy burn.