Copyright 2001 Globe Newspaper Company The Boston
Globe
July 8, 2001, Sunday ,THIRD EDITION
SECTION: BUSINESS; Pg. E1
LENGTH: 1439 words
HEADLINE: IT
COULD BE WORSE... BUT AS ECONOMY STUMBLES AND VOTERS LOSE CONFIDENCE, THE BUSH
ADMINISTRATION COULD BE IN POLITICAL PERIL - MAKING REPUBLICANS WORRY AND GIVING
DEMOCRATS AN OPPORTUNITY
BYLINE: By Anne E.
Kornblut, and Sue Kirchhoff, Globe Staff
BODY: WASHINGTON - With the economy slumping, the
administration is struggling with a dilemma the Bush family knows all too well:
dropping poll numbers, a tough election on the horizon, and few remaining
options for improving the outlook in the short term.
Ever mindful of "It's the economy, stupid," the campaign slogan Bill
Clinton used to defeat his father, President Bush has cast himself as a careful
steward of the nation's economic health. Republicans argue the president has
acted aggressively, pushing his $1.35 trillion tax cut into law and promoting
the more than 90 million tax rebate checks to be mailed out later this summer.
The first 1 percent cut in income tax rates began to take effect on July 1
through a reduction in federal tax withholding from paychecks.
"Anyone . . . who's objective who's looking at this
has got to say this [tax cut] was a very smart thing to do," said White House
economic adviser Lawrence Lindsey. "We have put a floor under the economy."
Asked what the chances were that the economy would sink into a recession within
the next six months, Lindsey replied, "I think very small."
The Federal Reserve has weighed in, cutting interest rates six times
since January to combat rising unemployment and plummeting corporate profits.
But even though economists expect those rate cuts and the rebate checks to have
an impact in the next six to 12 months, the full Bush tax cut will not take
effect for years. Further increases in unemployment and declines in corporate
earnings are expected even if the economy slowly improves. The nation's jobless
rate rose to 4.5 percent in June, with manufacturers shedding 113,000 jobs.
That combination of factors puts Bush in political peril,
specialists said, and it has spurred a flurry of debate among Republicans about
how to prevent economic troubles from hobbling a second Bush presidency.
One point is clear: Sitting, waiting, and hoping is not
politically palatable for Bush or the Republicans, who fear they could face more
than the usual losses suffered by the party that controls the White House during
midterm congressional elections.
With polling data that
show voters losing confidence in Bush's ability to lead, Republicans are urging
Bush to get out front with new proposals. A recent New York Times/CBS poll
showed just 50 percent of Americans approved of the White House handling of the
economy. (Those numbers are better than voter approval of Bush on other issues,
such as the environment.) A survey by the Pew Research Center for the People and
the Press found nearly 60 percent hadn't thought much about the coming rebate
checks.
But even as the sluggish economy creates a
political imperative for action, it is hampering the White House's ability to
react. Corporate tax revenues have fallen sharply, which, combined with the tax
cut law, is eating away the non-Social Security portion of the budget surplus.
That could well leave Republicans short of money for a second round of tax cuts.
It could also hurt legislation that polls show is more popular than the tax law,
such as a Medicare prescription drug benefit.
And the Democrats are poised to pounce. "I think the more the economy
slides, the more problematic it is not only for the president but for all
Republicans," said the Senate majority leader, Tom Daschle, a South Dakota
Democrat. "We had warned that the economy was going to be sliding and that this
tax cut was going to aggravate it."
Legislatively, the
White House has a number of economic initiatives ready to go, including its
energy plan and trade-expanding legislation, and it's now examining whether to
cut regulation of business sectors, like telecommunications.
"Basically, they've shot all their bullets in the fiscal policy gun and
they've shot all the bullets in the monetary policy gun, so now they've got to
go to more aggressive regulatory" relief, said Kevin Hassett, a resident scholar
at the conservative American Enterprise Institute.
Ironically, the faltering economy has not appeared to strengthen Bush's
ability to fend off recent congressional efforts - from both parties - to impose
tougher rules on business.
The Senate has passed a bill
to give patients more rights to challenge decisions of managed care health
plans, despite Bush's warnings it could increase premiums. The Republican-led
House, worried that voters think the GOP favors business over the environment,
is paving the way for tougher fuel efficiency standards for sport utility
vehicles and has voted to block plans for oil drilling. And Congress is about to
take up an increase in the minimum wage.
"I don't think
anyone is happy the economy has slowed down," said Representative John E.
Sununu, Republican of New Hampshire. "Members of Congress, like people across
the country, are realists. They understand the economy does move in cycles."
Despite the shrinking surplus, the House majority leader,
Dick Armey of Texas, in a July 5 letter to his fellow Republicans, called for a
new round of tax breaks, including health care credits, and said the party
should be prepared to push through legislation to create Social Security private
accounts.
How bad is the economy? The United States is
not in a recession, technically defined as two quarters of negative growth. The
economy actually grew 1.2 percent in the first three months of the year, far
below the breakneck pace of the late 1990s. Lindsey expects anemic 0.6 percent
growth in the second quarter.
Corporate profits shrank
more than 6 percent in the first quarter, meanwhile, while high technology sales
are off 40 percent, productivity has fallen, and unemployment has risen. Still,
in relative terms, things are better than in earlier downturns. Unemployment,
though rising, is still low by historic standards. Energy prices have begun to
abate. Home sales have been good. Consumer confidence has improved.
"I don't think people feel doom is around the corner. It
doesn't feel like '81, when you had double-digit unemployment, super-high
interest rates. Interest rates have never been lower; people can borrow money
and buy homes," said a Republican strategist with close ties to Bush. "When you
really see political damage because of the economy is when unemployment gets
bad."
The Fed rate cuts already in the pipeline should
begin to be felt in the second half of the year, along with the stimulative
effects of the new tax law. Sung Won Sohn, chief economist for Wells Fargo, says
the rebate checks, along with the reduction in withholding and the increase in
the child tax credit, could lift economic growth by as much as 1 percentage
point in the second half of the year.
"In talking to
people, I'm getting the sense that [the tax rebate is] not a lot of money, it's
not going to make a lot of difference in people's lives," said John Crisafulli,
a principal at Cambridge accounting and consulting firm Tofias PC. "It probably
will have the impact that the government wants. Most people are thinking, 'I'm
going to go out and spend.' "
Saying the economy is set
to improve is not the same thing as saying it will quickly return to the rapid
growth of the 1990s.
In a recent survey of the chief
financial officers of more than 200 American companies, over a quarter said they
expected to reduce their work force by an average of 5 percent during the next
year. Overall, the corporate officials expected overtime hours would fall by
about 8 percent.
"They are realistic right now: They
think it's going to take a little while - it's going to take a year to get out
of this," said John Graham, finance professor at Duke's Fuqua School of
Business, who conducted the CFO survey in conjunction with Financial Executives
International.
The business community would dearly like
to see a new package of tax cuts, including expanded depreciation. Given the
shrinking surplus, however, few expect more than token changes. Major
corporations are focusing on trade legislation. And some are fighting a battle
over international economics, specifically the strong dollar.
"On the economic front . . . they can work on a more realistic
alignment of the dollar with respect to the euro and the yen" and other
currencies, said Jerry Jasinowski, head of the National Association of
Manufacturers. The current strength of the dollar "dramatically reduces exports
and profits as they are repatriated to the United States," he said.
Anne E. Kornblut can be reached by e-mail at
kornblut@globe.com. Sue Kirchhoff can be reached by e-mail at
kirchhoff@globe.com. SIDEBAR: FALTERING ECONOMY PLEASE REFER TO MICROFILM FOR
CHART DATA.
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