Snow Job

It was my misfortune to tune in to the Sunday talk shows last
weekend, when Treasury Secretary John Snow was making the
rounds in support of the administration's tax-cut plan.

Listening to Snow defend this misguided policy was deeply
disheartening. You expect spin -- that's what the Sunday morning
circuit has come to be about. But with the stakes so high and
the costs of getting it wrong so steep, the secretary's interviews were painful to watch.
This administration is fixated on shrinking government even if it
means consigning the living standards of millions of working families
to years of stagnation. Snow's performance showed that George W. Bush's henchmen will say
anything to make their case.

Kudos to George Stephanopoulos and Tim Russert, both of whom made admirable attempts to force their way through the secretary's litany of misinformation.
At one point Stephanopoulos asked (Russert had asked a similar version of this question earlier): "You say the president's jobs programs is
gonna give the economy a boost. But, as you know, the president
passed a big tax cut back in 2001 . . . . If the tax cut didn't work then,
why is it going to work now?"

In response, Snow argued that the 2001 tax cut did work, that the recession would
have been worse without it and that the "economy is still doing
reasonably well."

The tax cut may have shortened the official length of the recession,
but Snow's assessment of current conditions is way off. Thanks in part
to the ineffectiveness of the 2001 cuts, the recession has morphed
into the worst jobless recovery in the post-World War II period. Private-
sector payrolls fell 80,000 last month, more than 500,000 this year and
2.7 million since the recession began in March 2001. (That 2.7 million
will become about 3 million in June when the Bureau of Labor
Statistics plugs in its benchmark revisions to its payroll survey. Bureau officials have already announced that there were 300,000 fewer jobs than they had previously thought.)

The share of the unemployed who have been seeking work for at least
six months has been at or above 20 percent since last October, a clear
indication of the lack of job opportunities. The average unemployment
period jumped to 19.6 weeks last month, the longest average
length since January 1984. For every job vacancy, there are three
unemployed people looking for work. This dismal job market has
finally sucked the air out of the broad-based wage growth left over
from the full-employment economy of the late 1990s. For the first
time since 1990, the real weekly earnings of the typical full-time
worker fell for the last four quarters in a row.

If that's what a top economic official calls an economy doing
"reasonably well," I'd really hate to see what lousy looks like.

This administration had a chance to do the right thing in 2001, when
the recession was well under way. But instead of structuring a fiscal plan
that would have made a difference, it squandered the opportunity
and transferred the lion's share of the surplus to the wealthy. It's
true that Bush inherited the recession, but his policies have kept the
recovery slow and jobless.

In a series of questions, Stephanopoulos pressed Snow on whether the
administration's proposed tax cuts were the best way to create jobs.
He also tried to pin down Snow's position on unemployment insurance

Holding up a chart showing that unemployment insurance benefits are much more stimulative than the dividend tax cut, Stephanopoulos asked, "Democrats say a lot of other alternatives would put more money into the economy more quickly . . . . How do you respond to that?"

Snow's rationale here was that the administration doesn't want to extend unemployment
benefits because it wants to create jobs, not support the
unemployed. The way to create jobs, in the administration's view, is
through cutting taxes, such as those on dividend income -- thereby increasing
the flow of money to the wealthy in hopes that they'll spend or
invest it.

Here's where the real supply-side nonsense starts. Without doubt,
the dividend tax cut is the least defensible piece of this whole
package. While you could certainly find economists who don't like
dividend taxation, you really can't find one outside of the
administration who would put this on his or her list of tax cuts to help the economy get out of a jobless recovery.

The logic of the thing fails on every level. First, you've got to
believe that the cut would boost stock prices. There's no support
for this claim, especially if you look at the market itself, which priced in
a tiny bump that has since disappeared. Then you have to believe
that even though the dividend tax cut would benefit only the small,
wealthy minority that holds stock outside of pension plans (because
pension holdings are not taxed as dividend income), it will make them
feel even richer and they'll spend the money. Even if you swallow
this hocus-pocus, the stimulus would be imperceptibly small and
would come too late to make a difference anyway. And now the Senate
is talking about phasing the dividend cut in, even though phase-ins
are antithetical to stimulus.

Even Wall Street firms are critical. A research report from
Goldman Sachs reads, "The dividend tax exclusion looks especially
ineffective as a stimulation measure, providing
only 8 cents on the dollar." In other words, every dollar's worth of
stimulus now would be bought with $11 of future deficits.

Then there's all this nonsense about investors and small businesses,
the latest target of the administration's economic spin machine. This
is more pure supply-side fluff: Give
rich people more money and they'll make productivity-enhancing
investments. But does anybody really believe that what's holding
investors back right now is access to
capital? Interest rates are at 45-year lows, industrial capacity at
a 20-plus-year low. Information-technology inventories are still overstocked. Ask any
business economist not in this
administration and they'll tell you that what's holding back
investment is not the cost of capital or even cash flow, it's weak
consumer demand outside of a couple of
sectors, primarily housing and health care.

And by the way, there's another huge contradiction here. Remember
that the target of supply-side economics is the rate of productivity
growth -- the idea being that if you
free up capital investment, you raise the trend in this key
determinant of our living standards. But these same spinners brag
about how well productivity growth is holding up
in the recession. Their program targets the one economic variable
that's doing well right now!

Even the Congressional Budget Office (CBO) said the administration's plan
would have a negligible effect on the economy, as Stephanopoulos
pointed out. Snow's
response was the height of absurdity. He criticized the CBO for
scoring the whole package, saying it should have just looked at the
effect of the tax cuts. That's like a
basketball coach complaining that his team would have won if you just
don't count the other team's points.

Then there's the issue of deficits. Russert hammered Snow on this
question, pointing out the Treasury secretary's record of opposing deficit spending prior to joining the administration. "You used to have a very different view towards deficits . . . . Do you believe the deficit is still the most
pressing issue facing the country?" Russert asked.

Here Snow squirmed a bit because he's on record as opposing
deficit spending. But he correctly differentiates between running
deficits when the economy is way
below potential and when it's running up to speed.

And of course, there's every reason to run deficits when you need to for growth stimulation. Unfortunately, that's not what this plan is
about. Although the final version is still
at least a month away, under the original Bush plan less than 5 percent would be
spent this year when we need it most, which is why Snow himself
admitted that the plan only adds about 450,000 jobs in 2003 -- less than the private-sector job losses so far this year.

The long-term costs of running fiscal deficits are what would likely cause some long-term negative results of the Bush plan.
Two private, nonpartisan forecasting
firms, and Macroeconomic Advisors, both found that by the
end of the decade, because of deficit-driven increases in interest rates,
the Bush plan would lead to lower
gross domestic product growth., meanwhile, found that the plan would result in 700,000 fewer jobs than if the administration just forgot about it altogether.

Snow's nonsense goes on and on, but you get the drift. Administration officials will say anything
to sell their plan, even though it can't possibly provide the
immediate stimulus the economy urgently
needs. Instead, it will exacerbate income inequality, it will
probably slow the growth of the economy and jobs in later years, and
it will hobble government for years to come
by permanently lowering tax revenues. This, I believe, is the
primary motivation behind it.

As an economist who has tracked the living standards of working
families for a couple of decades now, what disturbs me most is that
in the face of the worst jobless
recovery of the last 50 years, the administration still refuses to
take measures that would really help. Aid to the fiscally strapped
states and another extension of
unemployment benefits are two ideas that would quickly get a
temporary burst of spending into circulation. (Remember that stimulus
effect of 8 cents on the dollar
noted above? For unemployment benefits, it's $1.73.)

I'm not naive. I recognize that the people who are driving the
administration's economic plans are exploiting the weak economy and
hijacking the stimulus debate in pursuit
of their tax-cutting agenda. But I really have trouble hearing Snow
defend a tax cut that is calculated to slash his own personal taxes by
$600,000 while others are struggling and the economy is sagging.

So here's my idea. The president has been on the stump arguing for
accelerating the cuts that were planned for later years, saying
that if a tax cut makes sense in 2008, it makes more sense now.
Well, these plans also include sunset provisions -- that is, budgetary
gimmicks to reduce the projected "cost" by pretending that the plan
will eventually be phased out. But if these sunsets are good ideas a
decade from now, they're better ideas today. Let's "sunset" this whole
crazy package and kill the beast before it sees the light of day.

Jared Bernstein, the director of the Living Standards Program at the Economic Policy Institute, is a former U.S. Labor Department deputy chief economist and the co-author of four editions of The State of Working America.

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