REVIEW & OUTLOOK
A War Economy
President Bush needs a fiscal plan of his own.
President Bush and his security advisers have shown mastery over their military and diplomatic portfolios since September 11, and the American public is rewarding him with record approval ratings. The same can't be said of the economy or of his finance team, however, and this weakness has the potential to undermine his overall war leadership.
Perhaps this is only a matter of first things first, and defense has understandably been the President's first priority. But--and this is an important caveat--the U.S. economy now seems headed into recession. If his Administration doesn't come up with a strategy to counter it, Mr. Bush could find himself without the strong economy that a war effort requires, not to mention eroding public support.
The early sign of the trouble to come is the spending panic already under way on Capitol Hill. With last week's decision to bail out the airline industry, Congress has encouraged everyone from insurance, steel, hotels and restaurants to hold out their hands. Ideas are also flowing fast to push money for unemployment benefits, raise the minimum wage and undertake a whole new national effort for schools, roads, bridges and waste disposal. Reviving the New Deal won't be far behind.
Now, not all government spending is wretched excess. Spending for defense is necessary and welcome, as is federal cash to improve airport security. This form of spending can help the economy by providing the sense of security and confidence that risk takers need. Without unleashing the ghost of Bud "This Highway's for You" Shuster, Congress could also invest in some infrastructure that would pay for itself over time, such as more new airports. A recession amid a national crisis is no time to make a fetish of a balanced budget.
But a wholesale feeding frenzy, which looks set to break out under the political guise of "fiscal stimulus," would be a problem. And Mr. Bush can't resist this deluge merely by saying no, which is the advice his economic team is giving him. Over the long term, he'll begin to look reactive and unconcerned. Once the military action ends, Mr. Bush will be in the spot his father was after the Gulf War, the political target of blame for economic hardship.
Mr. Bush needs a fiscal plan of his own, one that will actually fire the real engine of growth, which is private spending. And that means boosting incentives for people to work harder, invest more and resume risk taking.
The cleanest, most effective way to do this would be to accelerate Mr. Bush's cuts in marginal income tax rates. While they passed the Congress earlier this year, most of the cuts phase in over many years, not now when they're really needed. This makes more sense than the current talk of targeting tax relief to businesses or to a certain class of workers favored by certain Members of Congress. Someday speeding up depreciation allowances or cutting the payroll tax would be nice. This is not that time. The economy needs bold action with the twin virtues of acting fast and making sense over the long term.
Moreover, such tax relief will help to complement monetary policy. Over the past two weeks, the Federal Reserve has moved decisively to inject liquidity into the economy. Last week's cut in short-term rates demonstrates that the central bank is determined to be responsive. But when the short-term financial crisis abates, the impulse of central bankers will be to mop all that money back up. And that is the moment when the fiscal oomph from marginal tax cuts will be necessary.
If everything in Washington now must be "bipartisan," the fiscal deal here seems obvious. Mr. Bush would get his tax-rate cuts accelerated, and in return he could accede to some additional government spending, especially on infrastructure. Everybody gets the political credit, and the economy gets a boost.
It'd be even better if Mr. Bush created a Reconstruction Board to help him and Congress sort through the fiscal priorities. The Board would vet ideas and make recommendations; Congress would retain its power to vote the funds. This process would consider claims more dispassionately and, as important, provide some counsel and expertise if the recession produces bigger financial problems down the road. Our choice to run the Board, as we said last week, is former Federal Reserve Chairman Paul Volcker, a Democrat who's worked for Republicans.
President Bush has shown his ability to perform as commander-in-chief. Now it's time to seize the reins of economic leadership.
