Bush and the economy

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To say that President Bush was dealt a bad hand on the economy is a gross understatement. Although it was not known at the time of his inauguration in January 2001, the economy actually began contracting during that year's first quarter -- and then continued to decline for the next two.

Then, during the final month of the three-quarter contraction, terrorists destroyed the World Trade Center and attacked the Pentagon, sending consumer and business confidence spiraling downward. Two shooting wars followed, one in Afghanistan and the other in Iraq, even as a third -- the ongoing war against terrorism -- promised to be a lengthy, open-ended affair. Meanwhile, the Japanese and eurozone economies hit the skids and have recently resumed their declines.

In hindsight, the federal government's responses to these interconnected shocks to the U.S. and global economies withstand scrutiny rather well. Early in January 2001, the Federal Reserve began pursuing an expansionary monetary policy. In actions that were unprecedented, the Fed lowered its overnight interest rate target 11 times in 2001, reducing it from 6.5 percent to 1.75 percent. The Fed chopped off another half-percentage point last November as the federal funds rate reached its lowest level in more than four decades. Further loosening will likely occur late next month.

On the fiscal front, during the spring of 2001, the Bush administration engineered what arguably represented the most superbly timed countercyclical tax cut in postwar history. Had it been known that the economy was in the middle quarter of its three-quarter contraction, the 10-year, $1.35 trillion tax cut would undoubtedly have been much more front-loaded. The president amply corrected that inadvertent oversight last week by demanding from Congress, and receiving, a front-loaded tax-relief package that accelerates many of the tax cuts passed in 2001 and adds long-term, growth-inducing cuts in dividend and capital-gains taxes.

On a third economic-policy front, the Bush administration is tacitly encouraging the timely depreciation of the dollar in foreign-currency markets. It is a development that will make U.S. goods and services more competitively priced on world markets. Also, it could provide significant relief against intensifying deflationary pressures by encouraging foreign suppliers of goods to raise their prices and allowing U.S. firms to do the same. Under today's rather unique circumstances, a little bit of inflation would be most welcome.

An increase in the federal budget deficit has been the inevitable consequence of an economic slowdown, the bursting of the stock-market bubble, the prosecution of three wars and the attendant defense build-up. However, even at $400 billion, a budget deficit of that magnitude represents only about 3.5 percent of total economic output, hardly an unmanageable level under the circumstances. Do Democrats offer a rational, alternative policy prescription? As Democratic presidential candidates crisscross the country promising Hoover-like tax increases in the face of national and worldwide deteriorating economic circumstances, it is clear that they do not have even a clue.