Bush strategy: Spend now, pay later? ( 2003-12-02 09:08) (Agencies)
When US presidents seek
re-election, they almost always try to rev up the American economy a year or so
before voters go to the polls. George W. Bush is no exception.
And he has a big advantage over most of his predecessors, including his
father: an obliging same-party Congress and an accommodating Federal Reserve.
It is little wonder that the economy is finally showing signs of a rebound.
With three successive Bush-sponsored tax cuts, a surge in deficit spending and
Fed Chairman Alan Greenspan willing to hold interest rates at 45-year lows, it
seemed only a matter of time.
As the holiday season approaches, new economic indicators show a business
activity firming up and rising consumer confidence and spending. The housing
market remains strong, unemployment benefit claims are down, and stocks are
rallying.
"It is not an accident that the third year of a presidential term tends to be
the strongest year for the stock market," said David Wyss, chief economist for
Standard and Poor's in New York. "The dark cloud here is that somehow, you've
got to do something about the budget gap."
The budget, in surplus when Bush took office, is hurtling toward a US$500
billion annual deficit.
Failing to restrain spending now could increase the political pressure on
Republicans to raise taxes in years to come.
But for now, the Republican-led Congress and the president are on a roll.
Some of the outlays stem from the September 11 terror attacks, the Iraq War
and its aftermath. Bush has pledged to spend what it takes to protect America
from future terrorism.
But the spending spree goes far beyond increases in homeland security and
defence spending. It extends to domestic programmes that, in the past, Democrats
championed and Republicans were criticized for trying to reduce or kill.
Almost three years into his term, Bush has yet to veto a single bill.
Last week, Congress sent him legislation to revamp the federal health
programme Medicare, offering prescription drug benefits to 40 million elderly
and disabled people. Estimated to cost US$400 billion over 10 years, the measure
was eagerly awaited by Bush, who has promised older Americans help with drug
costs.
Congress earlier enacted generous subsidies for American farmers. A US$373
billion catchall spending bill awaits lawmakers in December.
A US$31 billion energy bill, rife with tax breaks and grants that range from
new subsidies for ethanol to help for a shopping centre, got short-circuited
last week. But Republican leaders and the White House pledge to try again in
January.
Bush had strived to avoid the mistakes of his father, who lost a second term
in the White House in 1992 when voters perceived he was indifferent to a
stumbling economy. But, in many ways, the current president is retracing steps
taken by President Richard Nixon three decades ago, some analysts suggest.
To win re-election in 1972, Nixon ramped up federal spending and took other
actions to juice the economy and financial markets, including imposing
wage-and-price controls to combat inflation.
Nixon won in a landslide. But the economy soon collapsed in a harsh
recession.
Inflation is not among Bush's problems. But artificial stimulation of the
economy usually backfires.
"There is enormous stimulus in the system," says Robert Rubin, who was
President Bill Clinton's treasury secretary. He cites the Bush tax cuts,
mushrooming federal deficit, heavy spending on defence and the current
low-interest rate environment.
"We have created a horrendous fiscal mess for ourselves," Rubin said,
worryingly.
Deficit spending can help revive a stagnant economy and help create jobs -
currently Bush's biggest problem.
But it can be dangerous if not reined in over the longer term, choking off
growth and leading to higher interest rates. For now, Democrats have little
choice but to rail against a spendthrift Republican Congress and its leader in
the White House.
The Medicare bill is "a US$400 billion charge to our grandchildren's credit
card so that President Bush can be re-elected," Democratic front-runner Howard
Dean asserted at a candidates' debate last week in Iowa. For once, his rivals
all agreed with him.
But Democrats have a dilemma. Any improvement in the economy, especially if
accompanied by job creation, is bound to give an election-year boost to Bush and
his party.
While Democrats can wring their hands over the legacy of budget deficits,
"The green eyeshade look at the deficit is not going to resonate with voters,"
said Thomas Mann of the Brookings Institution.
"The context for this election is set by the health of the economy and the
progress or lack thereof in Iraq. To the extent the economy grows rapidly, it
will help make up for lost ground in the first three years of the Bush
administration," Mann said.
