The Blog

Credit Where It's Due

Greenspan and Bush are getting beaten up for fixing the economy. Will they get credit when it counts?

12:00 AM, Aug 19, 2003 • By IRWIN M. STELZER
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A FUNNY THING happened on the way to our economic recovery: The people who engineered it are coming under fire for alleged policy errors. Federal Reserve Board chairman Alan Greenspan should be garnering kudos for his management of monetary policy and President Bush should be hearing applause for his handling of fiscal policy. Instead, the applause is being drowned out by the hisses.

Start with the recovery itself. Corporate profits are rising, bringing corporate net income close to historic highs, and producing a rise in CEO confidence. Wholesale sales rose by 1.5 percent in June, the largest jump in 14 months. Retail sales rose in July by a surprising 1.4 percent, as tax refunds and mortgage refinancings fueled spending on autos, building materials, and gardening equipment. The service sector grew for the fourth consecutive month. Even farmers are smiling, with a record corn crop and bountiful crops of soybeans and wheat predicted, along with higher prices for these and other commodities.

So after meeting at the ranch with his notably unimpressive economic team, the president pronounced himself satisfied that his tax cuts will soon generate growth so robust that the nation's job-creation machine will spring to life. But Bush's critics don't share his optimism. Although tax cuts have put money into consumers' pockets just when the surge in long-term interest rates (rates on 30-year mortgages rose from the lowest level in 40 years, 5.21 percent in mid-June, to 6.34 percent early this month) has produced a 68 percent plunge in the mortgage refinancings that have kept consumers spending afloat, the president is under fire from Democrats who profess worry that the federal deficit, predicted to hit $455 billion this year (and rising), will slow the economy in the long run and leave future generations with huge debts.

Bush dismisses such talk as partisan sniping. The deficits, he says, are due to the recession's effect on tax receipts, expenditures connected with the war on terror, and Congress's refusal to cut spending on less essential programs. Besides, he knows that deficits, GDP, productivity, corporate profits, and other indicators beloved of economists are of little interest to voters, who look almost exclusively at job figures.

Which is why the president worries most about the two million jobs that the economy has lost since he moved into the White House. It's also why he dismisses criticism of the mounting deficit with the folksy comment that he is more concerned about creating jobs to enable families to put food on the table than with "economic theory and economic numbers." That comment put me in mind of a conversation I had with one of his closest advisers: "If you want to be a successful politician in Texas," he said, "it is best not to remind the voters of your Yale undergraduate degree and your Harvard MBA."

Greenspan, whose progressive cuts in short-term interest rates helped avert a major recession, is also under fire. Both Washington's politicians and Wall Street's money men are blaming the Fed for the unprecedented fall in bond prices and the rise in long-term interest rates.

Never mind that long-term rates have risen only to levels consistent with history and that they generally rise when an economic recovery is underway. The White House politicians know only one thing: that the president desperately needs a booming economy, and soon, if he is to win next November. So they are decidedly unhappy that rates have recently risen more rapidly than in recent history. After all, higher rates might discourage the business investment needed to make sure that the current, consumer-led economic recovery doesn't peter out. Economists at Goldman Sachs are saying that "The increase in long-term interest rates is likely to subtract about one percentage point from real GDP growth [and] . . . push growth back down to a below-trend pace in 2004."

Not words to lighten the hearts of the Bush-Cheney '04 team, many of whom still blame Greenspan for deciding in 1992 that the already-recovering economy didn't need the added stimulus of lower interest rates. Bill Clinton and his "It's the economy, stupid" campaign followed, forcing Bush pére to return to private life four years ahead of plan.

Equally unhappy are the Wall Street types who got badly burned last month when bond prices fell. They thought that the bond boom which had taken prices to unprecedented levels--and the flip side, interest rates to record lows--would last forever. They guessed wrong and blame it all on Alan Greenspan who, they say, led them to believe the Fed would support bond prices, and then reversed course.