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Summary
and Analysis of the
President's 2005 Budget
Economic
Assumptions Still
On the Rosy Side
The Bush Administration continues its vain claims that excessive tax cuts will improve the economy and the budget. As in the last three years, its claims will be unfulfilled. It is likely that the economy is gaining some traction after its long slide from the recession that began and ended in 2001. However, the Administration misreads this inevitable bottoming out as the dawn of a supply-side renaissance. That is not the case.
The Administration has continually misread the failure of the economy and the budget to respond to its tax-cut therapy. It has assigned the economic sluggishness to world events, rather than to the impotence of the tax cuts. But the answers are in the evidence.
- Economic Failure Not Caused by Terror or War —
The budget and the economy did suffer because of the terrorist
attacks of September 2001. But to assign primary blame to September
11 for today's budget problems is to avoid responsibility for
serious policy mistakes. Those who say that this is a war budget,
and who say that the colossal deficit is the fault of the war,
forget that there is no funding for the cost of the war in 2005
in this budget. They cannot have it both ways. If there is no
war spending in the budget, then there is no war spending in the
deficit. Spending directly related to September 11 was but a small
fraction of the current $400 billion - $500 billion deficits,
and it is now far behind us.
Nor is it factual to blame the terrorist attacks for the weakness of the economy. Some economists feared that the terrorism would frighten and deter consumers from spending. But that never happened. Consumer spending was already weak before September 11 (as a part of the recession that had begun in March), but then bounced right back in the fourth quarter of 2001, beginning in October. Consumers refrained from spending their dollars on some things, like travel and tourism, but they quickly spent those dollars on something else, keeping the aggregate level of spending high. Shortly after the terrorist attack in September, the economy exited the recession in November, according to the Business Cycle Dating Committee of the National Bureau of Economic Research, the official authority. So we should not exaggerate the impact of the national tragedy of September 11 on the economy by itself.
- Tax Cuts Yielded No Economic Benefit for Almost Three Years
— Our Republican colleagues and the President are eager to
claim that the last two quarters of stronger economic growth prove
that the tax cuts are working. They do no such thing. Almost three
years ago, when the President's first and biggest tax cuts passed,
two things were certain: first, that some day thereafter, there
would be some strong economic report; and second, that whenever
that occurred, Republicans would rush forward to claim credit
for their tax cuts. That they had to wait for almost three years
for the first favorable economic news is the best evidence that
the economic recovery is the result of the constant industry of
the American people — not the tax cuts. There is no ground
for claiming credit for the tax cuts now, ignoring their failure
to produce over the three years before.
- Stock Market Is Not a Policy Instrument — Some also argue that the tax cuts must be working, because the stock market is up. Forget that it makes much more policy sense to try to build a strong economy, so that the stock market will be strong, rather than pretending that policy can influence the stock market, so that the market will push the economy. Instead, just look at where the market is in comparison with the last four years. The Dow Jones Industrial average is up from its lows, but has recovered only about 80 percent of its losses. The NASDAQ is also off of its Bush-Administration lows, but is still at less than half the value of its previous peak.
- Economic Assumptions Lean Rosy — For last year,
the Administration's economic numbers may appear to be cautious.
The GDP figures did surprise on the upside, particularly in the
third quarter of last year, and the Administration's forecast
had to be completed before those numbers were fully known. However,
the Administration's real growth projections for future years
remain more optimistic than CBO's, and generally more optimistic
than the private sector's. This is significant in that the growth
of the labor force will begin to slow in the later part of this
decade, as the retirement of the baby boom begins. If the Administration
remains optimistic in the light of that unprecedented development,
it runs the risk of departing markedly from the actual course
of the economy.
- Economy Will Not Redeem a Budget Going Downhill — In other respects, the Administration numbers are fairly close to the mainstream. However, the Administration's overall budget package is more noteworthy for what the economic assumptions do not say. Even under its own economic forecast and estimating assumptions, the Administration budget remains in deficit — forever. In fact, its deficits explode in the years beyond its truncated five-year budget window, as shown by the budget's own charts (in "Stewardship," chapter 12 of the Analytical Perspectives volume). The Administration implicitly hopes for the economy to outperform its forecasts, in order to escape its own projection of perpetual deficits. However, with private and other government forecasters having already concluded that the big budget deficits are a net negative for the economy, even in company with the tax cuts, these hopes are most unlikely to be fulfilled.
Over the last three years, the Administration has wished for a stronger economy to make its supply-side dreams come true. The economy may finally be finding its feet after its long and sodden recovery, but this is the result of natural cycles of inventory depletion and replacement investment, not any supply-side response to changes in tax policy. The President will wait in vain for confirmation of his economic policy principles.
