As long ago as February of 2002, economists such as Paul Krugman of Princeton and Stephen Roach of Morgan Stanley urged caution at concluding that a slowing in new unemployment claims and a stabilizing of industrial production signaled economic recovery. Rather they warned at the possibility of an appropriately named "W-shaped" recession -- also known as a "double dip" recession. Factors in February suggesting a double-dip included:
- The impact of unemployment. Although the number of workers without jobs had stabilized, many had been out of work for months and had exhausted their benefits.
- Local governments out of funds. Many local governments were expected to cut spending and lay off workers, further depressing the economy.
- The so-called tax refund. The psychological impact of owing $300 more than expected (because the so-called refund was really an advance on future tax cuts) had the potential to dampen consumer spending.
By May economists predicting a double-dip were still a minority, but the widely anticipated booming recovery had not materialized. Some observers suggested that an inaccurate comparison between Ronald Reagan and George W. Bush had lulled the investment community into a belief that the economy of 2002 would recover the way it did in 1983. Both administrations had enacted large tax cuts, railed against evil, and had the benefit of a Federal Reserve board that cut interest rates. In 1982, however, the economy had been held back by high interest rates, so that when they were lowered, it accelerated. By contrast, in 2001 production had exceeded demand. Moreover, in 1982 high interest rates had helped create a housing slump, which was relieved when interest rates eased. Now, though, interest rates were low enough that housing investment continued through the recession -- perhaps even artificially accelerated, in a "bubble." Nonetheless, consumer spending continued, defying (at least for the time being) pessimists who predicted that unemployment would lead to a decline.
But perhaps the most ominous difference between 1983 and 2002 was the declining trend in foreign investment in the U.S. In the 80s, once the economy turned the corner, foreign investments flowed back into U.S. markets. This time, Enron, looming accounting scandals, Bush administration tariffs on steel and lumber, intelligence service foul-ups all contributed to what Barton Biggs is quoted as referring to as a "fall from grace" in the minds of foreign investors. At a minimum the celebrations of an economic recovery earlier in the year now seemed premature.
In June, a report from the Center on Budget and Policy Priorities on the hidden costs of the administration's Social Security proposals prompted the beginnings of the disinformation campaign that would eventually be formalized into a Republican "playbook" for the congressional races. The plan, as the report by Peter Diamond of the Massachusetts Institute of Technology and Peter Orszag of the Brookings Institution documents, entails severe cuts in benefits, as well as trillions of dollars of income the source of which is not identified. As the CBPP press release accompanying the report outlines:
- First, the plans restore long-term balance to Social Security either solely (under one of the plans) or primarily (under the other plan) through Social Security benefit reductions. These benefit reductions would be large and would affect all beneficiaries, including disabled beneficiaries and those who do not elect private accounts.
- Second, the plans would replace part of the scaled-back Social Security system that would remain with a system of private accounts. Those choosing the individual accounts would have some of their payroll taxes diverted from Social Security to the accounts; in return, their Social Security benefits would be reduced further. The amount that Social Security would lose because of the diversion of these payroll tax revenues would, on a permanent basis, exceed the additional Social Security benefit reductions to which these beneficiaries would be subject. In addition, the accounts would create a cash flow problem for Social Security because funds would be diverted from Social Security decades before a worker’s Social Security benefits would be reduced in return. The private accounts consequently would push the Social Security Trust Fund back into insolvency and permanently worsen Social Security’s financial condition.
- To avoid insolvency and restore long-term balance, the plans’ third component consists of the transfer of extremely large sums from the rest of the budget to make up for the losses that Social Security would bear because of the private accounts. The transfers would equal two-thirds of the entire existing Social Security deficit over the next 75 years under one of the Commission plans and 80 percent of the Social Security deficit under the other plan. (The second plan assumes additional transfers from the rest of the budget to reduce the magnitude of the Social Security benefit reductions it contains.)
The administration response to the CBPP report was described by one commentator as "hysterical." Charles Blahous, formerly executive director of the administration-appointed committee to study Social Security, insisted that private accounts did not affect the solvency of the Social Security system because the same amount of money was available (if you count the private accounts as part of the total). The money is no longer available to pay benefits of older Americans, however, whose own contributions to the system were already used to pay the benefits of previous generations. Republicans were instructed to state that personal accounts -- which are as risky as any private investment -- did not constitute "privatization." "Do not be complicit in Democratic demagoguery," one memo reportedly reads.
Also in June, Democrats set in motion a strategy to "make the House elections a referendum on which party will put an end to corporate greed and corruption," the Washington Post reported. Democratic spokeswoman Jenny Backus coined the term "economic patriotism," hoping that voters will agree with Democrats that economic recovery is as much a patriotic quest as the war on terrorism. House Minority Leader Richard Gephardt, one of the architects of the plan, described Republican efforts since 1995 to repeal regulations and weaken the tax code as having "created an environment" that encouraged corporations to break the rules without fear of penalty. But Representative Thomas M. Davis III of Virginia, chair of the National Republican Congressional Committee, warned that, although the strategy might work if Republicans did not respond, "we're not going to leave it unanswered."It's not like we're protecting" corporate criminals, he added. "[Democrats] have no moral high ground on this at all."
As economic news increasingly displaced news of the war on terrorism in newspaper headlines and network broadcasts, and corporate executives resigned or in some cases were arrested, pollster John Zogby, found that the public no longer trusted Republicans more than Democrats on economic issues. "The economy could be the sleeper issue, he said. "A lot of people, especially 401(k) holders, are scared."
After the House defeated legislation, sponsored by Democrats Richard E. Neal of Massachusetts and James H. Maloney of Connecticut, that would have eliminated the tax benefits that corporations now receive from incorporating outside the U.S., the Democratic Congressional Campaign Committee (DCCC) issued a statement outlining how the bill would have affected Tyco International, which has plants in Pennsylvania but reincorporated in Bermuda in 1997. (Tyco CEO Dennis Kozlowski was indicted in June by Manhattan NY District Attorney Robert Morgenthau for tax evasion. The SEC has been investigating events surrounding his resignation). The Tyco plants are in the congressional district of Representative George W. Gekas, who is in a close race with Democrat Tim Holden. "Representative Gekas took sides in the fight between ordinary Americans and corrupt corporate practices," the DCCC statement declared. "At a time when our country is fighting a war, these companies are planting their flags overseas for a quick buck."
In Illinois, Democrat David D. Phelps highlighted his support for the Patriot Purchasing Act of 2002, which denies government contracts to firms that have reincorporated overseas, including Tyco. In Mississippi, Democrat Ronnie Shows pointed to his support of the Corporate Patriot Enforcement Act of 2002. "I will not stand by and allow companies to skip town and stick individual Americans with the tax bill," Shows said. "Patriotism must not take a back seat to profits."
The Politics of Economic Policy
By July, the NASDAQ had fallen by 75 percent from its level in early 2000; the S&P had fallen more than 40 percent. Yet on July 24 Bush still publicly supported privatization of Social Security. Those Americans whose retirement funds are invested in 401(k) plans tied to sagging securities markets faced the difficult choice between not retiring when they planned, or making due with much less. Some 401(k) plans will have dwindled to the point that Social Security represents the only source of retirement income. Why in such an environment would Bush continue to advocate privatization of Social Security? Some observers suggest that one factor is an ideological commitment to roll back every progressive initiative since the New Deal. Others suggest it is an inability on the part of the administration to admit that it has made a mistake.
A darker reason is suggested by Bush's track record in Texas. During his tenure as governor, one of his most notable (or notorious) accomplishments was to privatize the investments of the huge University of Texas endowment fund. Donald Evans, now Secretary of Commerce, headed the nonprofit (nonpublic) University of Texas Investment Management Corporation, funneling an estimated $1 billion in investments (and the accompanying commission fees) to cronies and Republican contributors. The Wyly brothers were among the beneficiaries; they would later fund the smear campaign against John McCain in the South Carolina primary. Privatizing Social Security could function similarly, as privatization schemes would likely involve a small number of approved private investment funds whose managers would reap exorbitant fees. As the Houston Chronicle put it in 1998, "When a Bush is in power, Bush's business associates benefit."
By late July commentators and op-ed pages around the country were expressing concern that politics were dictating economic policy.
A July 25 editorial in The New Republic put it as follows:
When asked last month to account for the dollar's recent decline, Zurich Group economist David Hale told The Wall Street Journal, "The world fears that Karl Rove now controls U.S. international economic policy."
To understand the latest way in which politics is dictating economic policy, one need look no further than Treasury Secretary Paul O'Neill. In recent weeks O'Neill's chronic inability to speak reassuringly on economic matters has made his resignation less a matter of if than when. Wall Street, most Democrats, and a growing number of congressional Republicans believe he must go now, while there's still an economy to reassure people about. But the administration reportedly believes O'Neill should leave only after the midterm elections. As one source close to the White House explained to The New York Times on Sunday, "[The administration] can't make any changes before then because it would look as if they were accepting the blame for a bad economy." It seems Rove has decided that dumping O'Neill too soon would undermine his most promising midterm election strategy--pinning the current economic tumult on Bill Clinton.
So the White House is sticking with a man who wildly misunderstands his job. At times like this, the Treasury secretary should be soberly explaining why the economy is fundamentally on track....
..[T]he world looks to Washington and sees someone who doesn't even understand that confidence is a problem. "If people don't like what I'm doing, I don't give a damn," O'Neill recently told the Times.
The problem is that the "people" who don't trust the Treasury secretary are the same ones destabilizing the market: jittery investors.
W. Shapes a Recession
By early August, the drop in the economy's growth rate from 5 percent in the first quarter to 1 percent in the second made the predictions of a "W-shaped" recession seem more plausible than ever. Yet most commentators remained optimistic. Paul Krugman ascribed this unfounded optimism to "wishful thinking. Wall Street wants to sell stocks, he noted, so it is in Wall Street's interest to be optimistic about the economy. Likewise government forecasters have a stake in slanting their forecasts in a positive direction.
The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.
Throughout the economic crisis the effect of Bush's denunciations of corporate criminals and cheering on the market generally was the opposite of what he intended. Even conservative commentators noted the phenomenon. Stephen Moore of the Club for Growth, a conservative political action group, observed "He opens his mouth, and the market goes down. I'm not saying he's responsible for the market crash. But he hasn't inspired a rush for investors to get back in." Republicans and Bush supporters blamed a weak economic team, which forced Bush into the unwanted role of being his own economic spokesman.
Senator Chuck Hagel, Democrat of Nebraska, agreed "[Bush] obviously has not been very effective," he said, adding that Clinton treasury secretary Robert E. Rubin had been a stabilizing influence. "People knew when they listened to Clinton that there was something behind him. There was Bob Rubin, there was an economic team. I don't think the markets see anything behind this president's words." Calls for O'Neill's replacement or reassignment continued, with some Republicans warning that Bush could face the same fate as his father did in 1992. Bush Sr., while seen as having been effective during the Gulf War, lost the '92 election partly because he was perceived to have lost control of the economy.
According to the New York Times, "many Republicans" believe that none of the administration economic officials has the background and qualities to serve as an effective spokesman on economic policy. Budget director Mitchell E. Daniels Jr. has been described as having an "abrasive" manner, and has alienated members of congress. Chief economic advisor Lawrence B. Lindsey lacks the requisite political and presentation skills. Donald L. Evans does not have the stature, and as commerce secretary doesn't have the charter to serve as the voice of economic policy for the administration.
Mr. Bush's efforts to serve as his own economic spokesman have been disastrous. On July 9 he delivered a speech on Wall Street that was intended to calm the financial markets. The Dow Jones industrial average fell almost 700 points that week -- nearly 200 of them on the day he delivered the speech. Two weeks later, on July 22, when Bush defended treasury secretary O'Neill publicly and said "there is value in the market now," the Dow dropped almost 3%. On July 30, with great hoopla, Bush signed a bill targeting corporate fraud, and the market indices remained essentially unchanged. The next day Bush proclaimed that "we're headed in the right direction," while the Commerce department was announcing that the economic growth rate dropped from 5 to 1 between the first and second quarters of the year.
That Economy Show
Robert Hormats, vice chairman of Goldman Sachs International complained, "People won't be reassured by a pep rally. They will be assured by candid discussions and a frank assessment of the strengths and challenges the economy faces." Claiming to be addressing these and similar concerns, the White House announced an economic forum, to be held in Waco, Texas, August 13. Almost immediately critics asserted, and Republicans acknowledged, that the summit was "as much about crucial public relations as collecting expertise." In other words, it was exactly what Hormats warned against.
The credentials of many "forum" participants included having donated generously to Bush and Republican causes. Glen A. Barton, chairman and chief executive of Caterpillar Inc. was the guest speaker at a panel on trade. Over the last six years, Caterpillar's political action committee donated more than $600,000 to Republican candidates, according to the nonpartisan Center for Responsive Politics.
E. Floyd Kvamme who is co-chairman of the President's Council of Advisors on Science and Technology, and a Silicon Valley venture capitalist, chaired a panel on technology and innovation. Kvamme was a Bush "Pioneer," having raised at least $100,000 for his presidential campaign.
Charles R. Schwab, founder and chairman of the discount brokerage Charles Schwab Corp., spoke at a panel on investing and retirement. The Center for Responsive Politics reports that over the past four years Schwab gave $975,000 in soft money to Republican committees. (Recent legislation will eliminate soft money contributions after the November elections.) Schwab is also number 11 on the Fortune Magazine "Greedy Bunch" list of executives who sold stock while their companies lost value. Schwab is preceded on the list by Lou Pai of Enron, and Gary Winnick (who, according to Fortune, "treated Global Crossing as his personal cash cow--until the company went bankrupt").
Also among the speakers was John T. Chambers, CEO of Cisco Systems. (Chambers is number 13 on the "Greedy Bunch" list.) In the year 2000, Cisco was the world's most valuable company, with a market capitalization (shares outstanding X share price) of more than $500 billion. The company excelled at using its own stock as if it were currency. Employees were compensated with stock options, and other businesses were acquired by issuing stock. In this way the investment of Cisco's original shareholders was diluted, without declaring it a business cost.
To some analysts, Cisco's business practices have seemed indistinguishable from a pyramid scheme.
But because of loopholes in accounting regulations for which Cisco had lobbied intensively, its transactions were legal. In the recent slumping financial markets, Cisco has not gone bankrupt, but it has lost 80 percent of its market value. Byron Wien of Morgan Stanley has said that the failure to account for stock options as an expense is at the root of the current corporate scandals. "[A]nyone who says that stock options aren't an expense destroys his credibility on all other issues," he told a group of analysts recently.
Cisco still refuses to treat stock options as an expense, and the Bush administration has stated that it opposes accounting regulations that would force them to do so. In fact, after the recent moderate accounting reforms were passed, following months of administration attempts to block them, the administration immediately issued "guidance" to federal prosecutors weakening its provisions on whistle-blowers, document shredding, etc.
Speakers at the forum echoed administration policies from tax cuts to energy policy, in some cases using phrases from recent Bush speeches. Political adviser Karl Rove would not deny that the White House had provided talking points for participants to use in their presentations.
Perhaps unconsciously acknowledging the public relations aspect of the forum, in his opening remarks Bush thanked Baylor University -- site of the conference -- for "putting on a great show." His sage economic analysis was that "we're America." "I think one of the things you'll hear is that even though times are kind of tough right now, that we're America .We've got the hardest-working people in the world. We've got the best tax policy in the world. I mean, we got a lot going for us." He did not use the occasion to announce any new programs or solutions for economic ills. The one policy statement he made was that he would not approve $5.1 billion Congress had requested for emergency aid to fight terrorism. The bill included $150 million to equip and train firefighters, $90 million to improve communications for firefighters, and $90 million for long-term monitoring of the health of emergency workers at the World Trade Tower disaster site in New York City. The action prompted the International Association of Firefighters to vote to boycott an October ceremony in Washington, DC to honor fallen firefighters, at which Bush is expected to speak.
The Federal Reserve board was meanwhile issuing a more pessimistic assessment than those heard in Waco, suggesting that declining securities markets and the impact of corporate wrongdoing on investor confidence might require it to cut interest rates further. The stock market dropped following the announcement, with the Dow Jones industrial average finishing the day down more than 200 points.
While Charles Schwab was attending the forum his company announced that it would be laying off 400 employees. And American Airlines announced that it would lay off 7,000 employees.
The Washington Post, meanwhile, reported that Bush's proposals to privatize Social Security were losing support among Republican congressional candidates, in the wake of market losses. Representatives George W. Gekas of Pennsylvania and Charles W. "Chip" Pickering Jr. of Mississippi, who originally supported privatization, had declared their opposition. Rick Clayburgh of North Dakota, William J. Janklow of South Dakota, and Jon Porter of Nevada "disavowed" the idea of private accounts. Clayburgh went so far as to accuse his Democratic opponent, Earl Pomeroy of supporting privatization because he had voted for the Clinton administration initiative to allow the government to invest some Social Security funds on Wall Street.
Sham or Plan
"From San Francisco to Des Moines, New York to Houston, newspaper editorials eviscerated Bush's half-day economic summit in Waco, Texas. Business leaders and economic analysts condemned the effort as weak and devoid of ideas," declared the Toronto Star under the headline "Bush bashed over economic forum." A Washington Post editorial typified the journalistic response.
Among the adoring Cabinet officers and supportive business executives invited to the president's economic forum in Waco, Tex., there was a range of opinion: Some people thought Mr. Bush is doing a magnificent job, while others insisted that he is doing an extremely magnificent job....
"Recession and the cost of war and the cost of homeland defense have increased our deficits," Mr. Bush said yesterday. At his forum, there was no one to remind him that tax cuts are playing their part too. In the real world, they're part of the arithmetic.
Senate Majority Leader, Tom Daschle, called the event a "made for TV forum." Democrats were not alone in their criticism, however. William Beach of the conservative Heritage Foundation suggested that the intended audience was worried investors. "These are frightened people," he said, "and I think that is the main reason for having this fairly meaningless conference."
But Frank Rich, writing for the New York Times, suggested that the real purpose of the so-called economic conference was as a show -- a source of video bites of Bush looking concerned about the plight of what chief of staff Andrew Card referred to on CNN as "so-called real Americans." "This is how this administration always governs," wrote Rich, suggesting that apart from tax cuts and the "regime change" in Iraq, everything else the administration does "is a great show designed to provide the illusion of administration activity when it has no plan."
The Economist agreed with Rich's assessment that the Waco forum was intended as a show, but saw a different meaning behind it. With the subtitle "The president lays a trap for the Democrats," the Economist suggested in an August 15 column that the intended purpose of the so-called economic conference was, in fact, political posturing.
The Republicans are now becoming the bullish party, and the Democrats the bearish one. At a time when many economists are downgrading their forecasts for the economy, the president blared that "we're confident in the long-term health of the economy," and his treasury secretary, Paul O'Neill, bravely predicted there will not be a double-dip recession. Meanwhile, the Democrats are belly-aching about the slowdown and contrasting Mr Bush's economic record with Bill Clinton's.
If the economy is in miserable shape in November, the bearish party will surely do better. But the Democrats are taking a risk—and not just because the economy may improve. Sunny optimism, however misplaced, often plays better on the hustings than tormented pessimism, however justified. Mr Bush's stage-show in Waco may have had a point after all.
Rich, Frank "The Waco Road to Baghdad" NY Times 17 Aug. 2002
"Poor economics, well spun" Economist 15 Aug. 2002
Bumiller, Elisabeth with Edmund L. Andrews "Economic Outlook Is Positive, Bush Tells Texas Forum" NY Times 14 Aug. 2002
Friess, Steve "Firefighters Vote to Boycott Bush Sept 11 Tribute" Reuters. 14 Aug. 2002
McLaughlin, Tim "Tyco: SEC Reviewing Financial Statements" Reuters. 14 Aug 2002
"The Confidence Game" Editorial. Washington Post 14 Aug. 2002
Krugman, Paul "Clueless in Crawford" NY Times 13 Aug. 2002
VandeHei, Jim and Juliet Eilperin "Bush's Plan For Social Security Loses Favor" Washington Post 13 Aug. 2002
Bumiller, Elisabeth "A Role Unfilled" NY Times 12 Aug. 2002
Allen, Mike "Bush Economic Forum to Exclude Critics, Officials Say" Washington Post 9 Aug. 2002
Andelman, David And Nancy Dillon "DA widening Tyco probe" New York Daily News 8 Aug. 2002
Krugman, Paul "Dubya's Double Dip" NY Times 2 Aug. 2002
"Mouth Off" Editorial. The New Republic 25 Jul. 2002
Krugman, Paul "Fear of All Sums" NY Times 21 Jun. 2002
VandeHei, Jim and Juliet Eilperin "In House Bid, Democrats Target Corporate Abuse" Washington Post 26 Jun. 2002
Krugman, Paul "Where's the Boom?" NY Times 28 May 2002
Krugman, Paul "The W Scenario" NY Times 22 Feb. 2002
See also President Supports House Tax Bill from the Washington Post.