Political finger-pointing clouds economic realities

Election season has arrived in the United States. Genuine, honest analysis of public economic issues has started to fade further in favor of misleading rhetoric for political purposes.

"Expediency throws economic argument on its head," says Richard Kogan, an economist with the Center on Budget and Policy Priorities (CBPP).

Politicians, in the heat of campaigning, often assume a low level of economic knowledge among the voting public, and thus stretch if not ignore economic principles and realities.

Kevin Hassett, top economic adviser to Sen. John McCain during his campaign for the Republican presidential nomination in 2000, sometimes saw himself playing the role of chief engineer Scotty from Star Trek. When Mr. McCain and his staff started to explore ideas for economic policy, some proposals were impractical - the equivalent of Captain Kirk calling for a "higher warp speed than the engines could handle." So Scotty, alias Mr. Hassett, would need to explain that the idea was not based on economic realities.

Hassett, now at the American Enterprise Institute in Washington, warns that the developing campaign for the fall congressional elections threatens to be "nasty ... one of the most nauseating years in US policy history."

In the emerging campaign, many Democrats will blame President Bush for the recession, though it started last March, not two months after his inauguration. And Republicans somehow will trace the slump back to the policies of the Democrats under Bill Clinton.

Most economists, though, figure the current slump was caused by a combination of tight monetary policy by the Federal Reserve and the bursting of the stock-market bubble.

Senate majority leader Tom Daschle of South Dakota set off the latest political row by charging that the Bush tax cut was the largest factor "by far" in wiping out the federal budget surplus and that, further, it probably worsened the recession.

On the first charge, Bush asserted last year that the surplus was so massive that the nation could enjoy the tax cut - and still leave the Social Security surplus intact and pay off the federal debt in a decade. His administration billed the tax cut as costing $1.3 trillion over 10 years.

With less debt wiped out, extra interest on the national debt will bring the cost to at least $1.7 trillion, Mr. Daschle argues.

Treasury Secretary Paul O'Neill quickly responded: It was the recession and extra congressional spending that largely shrank the deficit. The tax cut was responsible for only 25 percent of the surplus shrinkage, he claimed.

Since most Democrats had charged that the tax cut was excessive, Mr. O'Neill's response had political overtones.

Analysis by the CBPP, a Washington think tank, explains the difference as primarily a political statistical ploy.

Secretary O'Neill used more favorable short-term numbers from 2001 and 2002. In those years, the tax cut was responsible for only about 24 percent of the budget-surplus shrinkage.

But the Bush tax cuts grow larger in 2004, 2006, and later. These cuts will mostly benefit high-income taxpayers.

Daschle used the more politically barbed 10-year outlook for the numbers in his speech.

At this time last year, the 10-year surplus was put at $5.6 trillion, Mr. Kogan notes. It is now reckoned at $1.8 trillion. This assumes today's budget deficit returns to a surplus later in the decade. So the 10-year surplus has shrunk by $3.8 trillion.

Of this shrinkage, $1.7 billion - or about half - can be attributed to the tax cut and the extra charges on federal debt, Kogan calculates. The economic slump and technical factors account for $1.4 trillion. And extra spending, most of it requested by the administration to deal with the war on terrorism or security issues at home, costs only about $600 billion. That small number makes it difficult for Bush to blame extra spending for the vanishing surplus, Kogan says.

But conservatives like Hassett charge that history shows Washington will spend 50 cents of any new surplus dollar that shows up just in the first year.

On the second Daschle charge, Hassett says "there is no economic paper anywhere" that supports the argument that a tax cut in a recession will make that slump worse. "That's just insanity."

Not so, says Peter Orszag, an economist at the Brookings Institution in Washington. The "back-loaded" Bush tax cut caused the bond market to assume more federal debt in the future. Thus long-term interest rates didn't fall so much in this recession. The annual cost of a $150,000 mortgage stands $1,500 higher than it should. Economic damage from those higher interest rates more than offset the mild stimulus from last summer's tax rebates, Mr. Orszag says.

Most economic models take account of this effect, Orszag says. This pattern was reversed in 1993. Taxes were raised, long-term rates fell, and the economy responded with a boom.

Considering its complexity, this economic debate isn't likely to be prominent in the election campaign ahead.