The tax cuts were the appropriate medicine for the economy and are already having the desired effect, yet the president’s approval rating for economic management continues to fall.
In part, this is due to a series of politically motivated economic mistakes that have slowed the recovery. Not everyone in the administration has learned that good economics is good politics and vice versa. Fortunately, if the administration takes immediate corrective action, the mistakes will not be fatal.
The administration imposed steel tariffs, believing it would make steelworkers happy by creating more steel-making jobs. The facts are now in, and, as most of the president’s own economic advisers warned, the higher prices that steel users are paying have killed more jobs in those industries than the tariff has saved in the steel industry. For 200 years, good economists have known protectionism backfires, and the steel tariff again proved the point.
Federal government spending is rising as a percentage of GDP, reversing the trend of the 1990s. The growth in spending has been caused by the war, the recession and the lack of political will to reduce nonessential spending. Government spending crowds out private spending, and, given that most government spending is less productive than private spending, overall economic growth suffers.
As former Treasury official Bruce Bartlett observed, President Reagan constantly used his “bully pulpit” to point out the dangers of excessive government spending. Even President Clinton came to understand — at least at times — that rapidly growing government was not compatible with a rapidly growing economy.
President Bush has yet to veto a spending bill, despite the obvious waste in much federal spending. This inaction on the spending front sends all the wrong messages. If the administration and the Congress believe we need to spend more on the war, then both branches of government must be more responsible by cutting growth in wasteful domestic spending.
Treasury Secretary John Snow has been urging China and some other nations to raise the value of their currency against the dollar in the belief it will help some U.S. manufacturers.
If he were to succeed, which fortunately is unlikely, the effect would be higher prices for American consumers, thus decreasing their real standard of living, and increasing costs for all those American manufacturers who buy foreign components for their products.
The administration is operating under the same fallacy as it did with the steel tariff. Yes, a few manufacturing jobs might be saved in the short run. But, in the long run, Americans will have less spending power, which will cost many more jobs than those saved.
The political folks in the administration can see the concentration of benefits but appear blind to the dispersion of costs of moving away from the strong dollar policy that has served us so well since the Reagan administration.
During the last week of the Clinton administration, a foolish and dangerous IRS regulation was proposed at the behest of the French to require U.S. banks to help foreign governments tax interest earned on certain bank accounts in the U.S. As former senior Treasury economic official Steve Entin has shown, this would drive out considerable foreign investment from the U.S., and cost the U.S. jobs and substantial tax revenue because of reduced investment in our economy.
Perhaps of even more concern is that the proposal would provide sensitive financial information on individuals and organizations to governments that are themselves corrupt (and, in fact, may be enemies of the U.S.) or have inadequate procedures to keep the information from falling in the hands of criminals, terrorists or governments that support terrorists.
Despite the urging of virtually every senior economist in the administration and more than 30 economic policy organizations, the administration has yet to withdraw the proposal.
Mr. Snow reportedly has told senior administration officials and senior members of Congress that he intends to withdraw the proposal. The problem is that every day he delays the withdrawal, he also discourages needed foreign investment.