Commentary: Bush administration, Federal Reserve trying to stimulate

Long Island Business News, Jul 25, 2003 by LIBN Staff

The Bush administration and the Federal Reserve are aggressively applying fiscal and monetary stimulus, but the economy can't seem to gain traction.

The recent announcement that the recession actually ended in November 2001 wasn't much consolation to those who can't find a job. The end of a recession used to mean an improved job market. Not anymore. Thanks to technology, productivity is now improving at about 2 percent a year. As long as that holds, the economy will need to grow at 2 percent annually before the job picture brightens.

In his visits to Congress last week, Federal Reserve Chairman Alan Greenspan promised to keep interest rates low - and pump up the money supply - for as long as it takes to spur decisive capital spending and new hiring. But that kind of accommodative fiscal policy fuels an already overheated real estate market. Consumers have responded by cashing equity in their homes and spending it, and what modest growth there is in this economy can be traced to that source.

But how long can this go on? Residential home equity reportedly has dropped from 69.9 percent of market value in 1982 to 55.2 percent today. That equity stake would dip further if rising interest rates were to drag down home values.

Meanwhile, the Bush administration is following its own short-term strategy that, like Greenspan's, counts on a significant economic rebound - soon. In the face of war in Iraq and soaring deficits, the president sought a tax cut of $700 billion-plus and settled for $300 billion-plus, which was all Congress would accept. Before Congress acted, former Treasury Secretary Robert E. Rubin, former Fed Chairman Paul Volcker and five other prominent members of the deficit watchdog Concord Coalition issued a joint warning that any new tax cut was fiscally irresponsible.

Under Rubin's leadership in the late 1990s, the United States turned massive federal budget deficits into huge surpluses. A boom era stimulated by low interest rates and widespread acceptance of the Internet spurred productivity, and tax revenues from that surge made the federal budget turnaround possible. But Rubin deserves credit for exploiting the opportunity by convincing Congress to require a "pay-as-you-go" offset for new spending plans and tax cuts.

Bush has abandoned that discipline and explained away the need for it by declaring this year's federal deficit of $455 billion "manageable."

Both Greenspan and Bush are out on a limb. They're counting on a strong rebound to bail them out, and we can only pray one's on the way.