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 benefits.
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, Economy.com 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. Economy.com, 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.
