Wanted: economists in the Bush administration

Last Tuesday was a resounding victory for the Republican Party, which maintained control of the House and won back the Senate. The Republicans scored their biggest points on national security and foreign policy issues. However, if President Bush wants to have similar success in the 2004 elections, the economy will have to improve.

George W. has said that he learned from the mistakes of his father, George H. W., who fell from giddy approval ratings during and after the Gulf War to lose, in 1992, to Bill Clinton because of a weak economy.

But a look at the personnel in the Bush administration shows no such lesson learned. The Bush foreign policy team is star-studded, with luminaries such as Colin Powell, Condolezza Rice, and Richard Haass. Regardless of your own political persuasions, it is difficult to deny that these individuals are intelligent, experienced, informed, and respected in their fields.

Where are the great members of the economic team? Paul O'Neill? Mitch Daniels? Harvey Pitt? These guys are lawyers and businessmen _ not economists. There is a big difference _ and it shows.

To be on the road to economic recovery, private investment needs to bounce back and match consumer spending, which has remained strong through the downturn (although it now shows signs of dropping off).

The President has repeatedly used the weak economy as justification for the heavy tax cuts to come in the next few years (even though he used a strong economy to justify the same cuts during his campaign).

But these cuts will have little or no effect in the short term _ most do not take effect until a few years from now, and the cuts will not be completed until 2010. It is not clear that tax cuts will have any ability to increase investment. Through the Reagan cuts of the 80s, investment actually declined.

Meanwhile, the government deficit is growing, as taxes are cut and spending is increased. There are three ways for a government to make up a deficit.

The first is to print money to cover the balance. The Federal Reserve would never comply with such a ploy on a large scale, as it would set off inflation. This is the government debt-hyperinflation pattern followed by many Latin American countries.

The second is to raise tax revenues. This does not look too probable in the short run, since President Bush is currently pushing to make permanent the tax cuts I described above, and GDP growth is still sluggish.

Finally, the government can borrow money. And this is what the US government does most of the time it needs money. But borrowing does not come for free. All the money has to be paid back at some point, and with interest. We spend about as much servicing our debt as we do on defense.

Government borrowing also slows GDP growth. When the government enters the loanable funds market, it increases demand, driving up price (which, in this case, is the interest rate) and this "crowds out" private investment, which in turn hinders economic growth.

Luckily, the President's proposal for privatization of Social Security has fallen by the wayside as public distrust of the stock market has grown. But I would be surprised if the proposal were dead. Any day now, Bush might start arguing again that privatizing social security will improve the government budget.

This is either nonsense or stealing. The Social Security system is a pay-as-you-go system _ the money being paid to retirees now is not the money they earned, but the money that people working now earn.

Think of it this way _ the government owes money to retirees. It pays back these debts by taxing workers. President Bush wants to let those workers invest those funds instead of giving them to retirees. But the debt to retirees has not vanished _ it remains, either to be repudiated, or to be paid using funds from other parts of the budget.

In the first case, the government is stealing. Those people paid social security taxes during their working years and are entitled to benefits. In the second case, you're creating more deficit, not surplus, as the Bush team claims.

All these issues are significant, but none will determine what the economy looks like in 2004. Politicians get too much credit and too much blame for the success or failure of the economy.

In reality, there is very little the Bush team could do to improve the economy. But the main task, in my view, is not in creating a specific tax or interest rate policy, but the nebulous areas of confidence and stability.

Canning Harvey Pitt, the embattled ex-chairman of the Securities and Exchange Commission, was a good start. Bush should continue to make strong, public, moves to show that he is dedicated to corporate reform. This will regain the confidence of investors. Also, dealing with the Iraq situation quickly and decisively will bring stability to markets. Right now markets are unsure _ unsure about the attack, about what its effect will be on the price of oil and on the international situation in general. And if there's one thing worse than a bear market, it's an unsure market.

The sooner this situation gets straightened out, the sooner firms will start investing again, the sooner jobs will be created, and the sooner GDP will start growing on its merry way.

This is no easy task. Stability and confidence take years and years to create and weeks to destroy. If President Bush is going to be successful, he should listen more to the economists in his administration.