Recent natural and political events have the potential of creating a perfect storm that could derail many of the positive economic developments that were spurred on by the Bush administration during its first term. The early returns are not very favorable to the economic outlook in the aftermath of Hurricane Katrina.
We are still in the beginning stages of the reconstruction game in the Gulf Coast, and the administration has plenty of time to recover from any blunders it made during the initial response to Katrina. Yet the administration had turned the winds against itself well before Katrina was even a blip on the radar screen.
On the economic front, the Bush administration has been sending a muted and confusing message. The best and most clear example of this came when the White House contradicted (or corrected) Treasury Secretary John Snow, who, according to the press, suggested delaying any tax-rate-cut measures in the wake of Katrina. Luckily the White House distanced itself from the secretary’s position, although this mixed policy message is symptomatic of an administration that is losing its fiscal-policy direction. Meanwhile, some static-thinking Republican senators have called for tax increases to fill the “revenue gap” that spending on Katrina relief will supposedly produce.
Has supply-side Washington been turned on its head?
The markets are clearly concerned about the White House’s behavior, with this president in danger of quickly becoming an ineffective lame duck. There simply seems to be no clear pattern as to how the administration plans to deal with current economic realities. The only certainties are that President Bush is willing to write a blank check for the reconstruction of the devastated areas and that spending will unambiguously rise over the next few months.
Predictably, the planned increase in spending has given ammunition to those who oppose the supply-side policy mix of low tax rates and a domestic price rule. Other than President Bush himself, no one in the administration has been making the case that the economic recovery of the last two years is due to the success of the tax-rate cuts of 2003.
We are now in danger of following static analysis down the wrong economic path. If only there were more people in the administration making the case that the 2003 tax-rate cuts on dividends and capital-gains were what delivered the recent economic vitality, the deficit mongers and static thinkers on Capitol Hill would have less of an argument for not making these tax cuts permanent.
In a few weeks the president’s tax commission will make its recommendation on tax reform. This could provide the administration the cover it needs to continue on the path to lower tax rates. A strong tax-reform recommendation (one that includes not only an extension of the 2003 tax-rate cuts but a further reduction of marginal tax rates) will give the Bush administration an opportunity to regain the tax-policy high ground. However, the pressure on the commission to adopt a revenue-neutral program may mute its report. Simply put, revenue neutrality in the new age of Katrina spending will take the edge off tax reform.
But now is not the time to be timid. The president still has an opportunity to forge ahead with his supply-side tax agenda. Leaders lead, they do not follow.
The president, however, will have to fight an uphill battle, particularly against the media. The liberal press will laud the recommendations of Sen. John Voinovich, who has been a member of the root-canal wing of the Republican party for some time. Voinovich, guided by static thinking, was the architect of a major tax increase while governor of Ohio. The press at the time called his actions fiscally responsible, although they have since failed to mention that the tax increase made Ohio extremely uncompetitive in relation to neighboring states and foreign manufacturers.
Ohio’s employment never recovered from the reduction in competitiveness that the Voinovich tax increase brought about. During the presidential election campaign last year, John Kerry blamed the employment loss in Ohio to outsourcing. However, much of that “outsourcing” was to neighboring states. Nevertheless, the lackluster economic performance of Ohio turned out to be one of the main reasons why Kerry nearly carried the state last November. In other words, President Bush almost paid for the policy mistakes a senator made while serving as governor.
The president and his administration must repel the recommendations of the static thinkers, for the sake of future Republican candidates and the economy at large.
– Victor Canto, Ph.D., is the founder of La Jolla Economics, an economics research and consulting firm in La Jolla, California.