- The Washington Times - Tuesday, December 10, 2002

Having derided in October 2001 a timely tax-cut stimulus proposal by House Republicans as "show business," Treasury Secretary Paul O'Neill understandably ruffled some Republican feathers in Congress. In doing so, he also demonstrated that he was hardly the ideal candidate to be the White House point man on Capitol Hill lobbying for next year's stimulus package. This became especially obvious after he had recently voiced reservations about the need for additional fiscal stimulus in the first place. He was wrong on both counts. And, so, it was time for him to go. Accompanying Mr. O'Neill out the door late last week was Larry Lindsey, the National Economic Council director who understatedly acknowledged recently, "I am not, I admit, the best judge of politics."

In abruptly dismissing his administration's two senior economic officials in what some have called "the Friday morning massacre," President Bush was focusing as much on politics as he was on economics. With the contest for the Democratic presidential nomination set to commence in earnest early next year, Mr. Bush knows he and his economic policies will be attacked by all Democratic aspirants. More than anyone else, he also knows that his father lost the presidency 10 years ago because Democrats successfully portrayed him as too inattentive to domestic concerns, particularly economic policy.

Especially frustrating for Mr. Bush must be the fact that the unemployment rate continues to rise, despite the fact that economic growth over the past four quarters has been 3.2 percent. Eerily for the White House, this conundrum mirrors the experience of the first Bush administration. Despite economic growth of 3.2 percent over four quarters ending with the third quarter of 1992, the quarterly unemployment rate jumped nearly a full percentage point, rising from 6.8 percent to 7.6 percent and dooming then-President Bush's re-election bid.

As confirmed by the experience of Jimmy Carter, who ostentaciously fired Treasury Secretary W. Michael Blumenthal in July 1979 amid rising public concerns about the economy, sacking the administration's top economic policymaker does not constitute economic policy. The firing is the easy part. The Bush administration must now redouble its efforts in pursuit of the right economic-policy mix. Prodding Congress to quickly pass a sound fiscal stimulus package is the next step.

If the 2001 tax-relief plan was the right policy then and we believe it was then accelerating the implementation of the next round of income-tax rate cuts, child tax credits and marriage-penalty relief is the right policy today. Given that investment spending has now declined for eight quarters in a row, it would also make sense to offer accelerated depreciation to businesses as an incentive to make investments today that are already planned for the future. By all accounts, newly nominated Treasury Secretary John Snow possesses the skills that are necessary to forcefully lobby Congress to follow the president's sound policy direction.

As this page has argued, the current budget deficit of 1.5 percent of GDP is sufficiently low that ramping it up in the short term to boost economic growth poses no long-term dangers. Those dangers can be found in the insidious forces of deflation, should they take hold. The Federal Reserve's monetary-policy committee, which convenes today, demonstrated by its one-half-percentage-point interest-rate reduction in early November that it was prepared to act aggressively. The Fed will unlikely reduce short-term rates today; nor should it. It should, however, send a needed signal to the markets: Given today's obviously greater danger of deflationary pressures rather than inflationary pressures, the Fed ought to announce that it believes "the economic risks are now weighted mainly toward conditions that may generate economic weakness." With a fiscal stimulus package on the way, that would be the right economic-policy mix.

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