The economy grew at a sizzling 7.2 percent last quarter, surprising many analysts. If this performance continues, it's good news for the Bush administration -- and the opposition Democrats will stop talking about the economy.
But before Bush and company declare "economic mission accomplished," consider two problems. First, the benefits of the growth are not trickling down. Second, a high growth rate built on Bush's policies is unsustainable.
Even with the highest growth rate since the mid-1980s, the economy shed another 41,000 jobs in the third quarter and has lost 2.7 million jobs since Bush took office. Second, a boom with deficits this huge eventually pushes up interest rates and is thus self-extinguishing.
Curiously, only about one-fifth of the quarter's high growth rate has resulted from the deficits. Most of it reflects low interest rates and consumer borrowing and spending.
It's sensible to run big deficits in the short run to help kick-start a flat economy. This year's deficit will be $250 billion to $300 billion, about 3 percent of GDP. If this were just a one-year stimulus program with a lot of aid to cities, states and the jobless, that would be about good policy.
But Bush's deficit was generated not to stimulate short-run demand or to keep public services flowing during a recession but to cut taxes -- most emphatically for America's wealthiest -- and to slash social spending. The problem is that spending has already been cut to the bone. Discretionary federal spending is at its lowest level in three decades.
There are also new claims on the public purse, such as the mess in Iraq. Even the Bush administration has pledged not to cut Social Security or Medicare and is proposing a new prescription drug benefit.
So further spending cuts are unlikely. Meanwhile, the big multiyear tax cuts legislated in 2001 and 2002 are just beginning to kick in. The higher growth rates will increase government revenues, but not nearly enough to compensate for the losses created by the immense tax cuts on the wealthy that take effect in 2004 and 2005. Thus even bigger deficits loom.
Sooner or later, these deficits will lead to higher interest rates as public borrowing starts competing with private demand for capital. And those higher rates will choke off the consumer borrowing and spending that has been the other engine of recovery.
The Bush tax cuts were also advertised as "supply side" tonics for capital investment. Business investment did improve slightly in the third quarter, but this is not likely to be sustained, because of a large overhang of excess capacity that discourages business from investing new capital.
In addition, the loss of manufacturing jobs is continuing, especially in the swing states of the Midwest. The administration has no strategy to deal with this loss. And the states are still experiencing a major budget crisis, which forces them to raise taxes and slash public services.
Ordinary people may get a small cut in their federal income taxes. But this is often more than offset by school closings, losses of other public services, and hikes in local property taxes or state sales taxes.
And even though the economy is beginning to generate some new jobs, good manufacturing jobs that pay upwards of $20 an hour are migrating overseas, to be replaced by Wal-Mart jobs. Ordinary people also face the squeeze of increased costs and reduced benefits in their health insurance.
Bottom line: The economy is still a risky proposition for the Bush administration. Deficits big enough to keep growth rates at anything like 7.2 percent are deficits that will scare the money markets and choke off the recovery. More normal growth rates of 3 to 4 percent will keep interest rates low but are not sufficient to produce plenty of good jobs.
Back when inflation was a problem, economists used to talk about a "soft landing" -- a reduction in inflation but not so wrenching to produce recession. What Bush needs is a soft takeoff: growth sufficiently robust to produce high-wage jobs but not frightening to the bond market.
In principle, this kind of growth is possible. But it won't result from the unbalanced fiscal policy of the Bush administration -- big, permanent deficits based on tax cuts for the rich coupled with starvation of public services.
In the end, voters base their economic conclusions on their personal situation, not on the statistics. To paraphrase the American Express ad, the economy that matters is yours. The third-quarter statistics may look good, but the economic condition of large number of Americans still feels precarious.
Robert Kuttner is co-editor of the Prospect.
This column originally appeared in yesterday's Boston Globe.
