No Relief in Sight
By PAUL KRUGMAN - NYT, February 28 2003 - originalTo Glenn Hubbard has resigned as chairman of the Council of Economic Advisers — to spend more time with his family, of course. (Pay no attention to the knife handles protruding from his back.) Gregory Mankiw, his successor, is a very good economist, but never mind: When the political apparatchiks who make all decisions in this administration want Mr. Mankiw's opinion, they'll tell Mr. Mankiw what it is.
Meanwhile consumer confidence is plunging, and almost two-thirds of voters rate the current state of the economy as "poor." Is there any relief in sight? No.
The conventional wisdom among business forecasters now calls for growth of a bit more than 3 percent over the next year. Growth at that pace is barely enough to keep up with rising productivity and an expanding labor force, not enough to make a serious dent in unemployment. And a growing number of forecasters think the conventional wisdom is overoptimistic, that the pain is about to get even worse.
One reason is the surge in oil prices, which acts like a big tax increase, siphoning off spending that might otherwise have helped create jobs. And forget about those cheerful predictions of cheap oil as soon as Saddam is gone. Yes, oil prices plunged after the 1991 gulf war; but as Philip Verleger of the Council on Foreign Relations points out, back then there were big inventories of oil that got dumped once the crisis was past; this time inventories are very low. And if the victory isn't as quick and easy as promised, or if the aftermath of war is as nasty as many fear, oil prices could easily go much higher.
Then there's the effect of the worst fiscal crisis in the 50 states since World War II. Iris Lav of the Center on Budget and Policy Priorities suggests that tax increases and spending cuts at the state level could drain $100 billion from the national economy over the next year. Aid from Washington is an obvious answer — but the Bush administration refuses to provide a penny.
Finally, the increasingly grim mood of consumers can be a self-fulfilling prophecy. If disheartened families cut their spending, the job picture will worsen even further.
So where's the upside? To be fair, there are some reasons for hope. Most notably, after two years of low business investment, there's presumably a pent-up demand for new equipment. As I understand it, the prevailing view at the Federal Reserve — which is considerably more optimistic than private forecasters — is that once war fears are behind us, business investment will surge, and all will be well with the economy. Sounds like wishful thinking to me, but let's hope they're right. Also, war itself can be an economic stimulus, as the Pentagon replenishes the munitions it uses up in Iraq.
But you don't have to be a doomsayer to feel that the negatives greatly outweigh the positives — that an economy that is already hurting badly is all too likely to get even worse. So what will the administration do about it? Nothing, of course.
Yes, I know, the Bush team is proposing about $1.5 trillion in tax cuts. But when pressed, administration officials admit that their plan will do little for the economy right now. Why? Because those are long-term cuts; only a tiny fraction of the total will flow into people's pockets this year. Furthermore, most of the tax cuts will — of course — go to affluent families, who will probably save most of the money.
Why is the administration so uninterested in helping the economy? Here's my theory: The depressed state of the economy provides a convenient if bogus rationale for the huge, extremely irresponsible long-run tax cuts that, after Iraq, constitute this administration's principal obsession. To do anything else to help the economy would suggest that it's possible to create jobs now without putting the country's future solvency at risk — and that's not a message this administration wants to convey.
I almost feel sorry for Mr. Mankiw, who I suspect has no idea what he's getting into; I'm sure he will soon feel frustrated over his inability to have any real influence on this disastrous policy. But on second thought I'll save my sympathy for the two million people who have lost their jobs over the past two years, and are not likely to find new ones any time soon.