Both Paul O’Neill and Lawrence Lindsey are able men, and were fiercely loyal to the president. Their downfall was a result of the “bumpy performance of the economy” - as President Bush put it - over the past two years and what turned out to be a series of Pollyanna-ish economic forecasts. It was only coincidence, but symbolic nonetheless, that what has come to be known in the US media as the “Friday morning massacre” occurred as new unemployment numbers were released for November, showing a sharp rise in the number of jobless.
Mr Bush and Karl Rove, his chief political stragegist, are keenly aware that the only thing that stands in the way of this enormously popular president being re-elected in a landslide in 2004 is the economy slipping into a double dip recession. Mr Bush’s father was thrown out of office 10 years ago despite foreign policy successes because he seemed to be inattentive to the ailments of the economy. And the truth is that Mr Bush Senior was guilty as charged.
This president wants a more aggressive economic stimulus plan to revive the 4 per cent economic growth of the 1980s and 1990s and, just as important, to bring the bulls back to Wall Street. No president has been re-elected in this century when the stock market has been down by more than 20 per cent during his first term. Mr O’Neill in particular did not share the White House’s enthusiasm for a big new tax cut next year. We can be sure that his replacement will.
What should that tax cut look like? What is needed now is a cut designed to benefit workers and investors. This plan should combine the Republicans’ goal of creating economic growth incentives and the Democratic goal of offering a slice of the tax cut pie for middle-income workers and those out of work.
The problem with the US economy is not insufficient demand from consumers, as many Keynesian economists have suggested. In fact, for the past year or two, the American consumer has continued to spend and the government has spent at an even more frantic pace. The problem is barriers to production. These barriers include over-taxation of capital and labour, over-regulation of the business sector and over-litigation. Unless these barriers are cleared away, no amount of Fed interest rate cutting or demand-side tax cuts such as tax holidays will impel businesses to produce.
If you want to see a symptom of the ailing US economy, look at the venture capital industry, which is almost entirely dormant today. Investors do not see the profit opportunities in new ventures. Costs are too high for new businesses thanks to government meddling; payoffs are too meagre thanks to excessive taxes on capital investment - the capital gains tax and dividends tax.
With that in mind, the president should endorse a tax plan that has three components.
First, Congress should reduce the capital gains tax from 20 per cent to 10 per cent on all new investment. Any share purchase made after January 1, 2003 should be taxed at a new lower rate in order to incentivise new business creation and lift stock values.
Second, Congress should chop the payroll tax on all workers from 15.3 per cent to 13.3 per cent. The payroll tax cut should remain in place until economic growth is resumed to 4 per cent and the unemployment rate falls back to the level of full employment. This would allow all workers to keep more of their pay cheques and lower the cost of labour so businesses would start hiring again. Third, implementation of the Bush tax cut from last year should be accelerated. Seventy per cent of the Bush tax cut has not yet taken effect. There is no point in delaying income tax cuts until 2005 and later years. The economy needs an adrenalin shot now.
The idea behind this plan, which the White House is considering, is to replicate the supply-side tax cut successes of presidents Ronald Reagan and John F. Kennedy. It was JFK who said: “It is a paradoxical truth that when tax rates are too high the economy will never produce enough jobs or enough revenues to balance the budget.”
Deficit hawks in both parties will no doubt squeal that this tax plan is unaffordable and will run up the national debt. They are wrong. What Presidents Kennedy and Reagan, and now George W. Bush have understood is that an absence of economic growth causes runaway budget deficits.
Mr Bush is riding high now with voters. He appreciates, in a way that his father did not, that this popularity can be fleeting. His father’s conqueror, Bill Clinton, was right when he said that “it’s the economy, stupid”. Mr Bush will soon have an economic team that understands both the politics and economics of growth.
If he can lead in the economic arena with the same tenacity that he has shown in the realm of foreign policy, he has an opportunity to be one of the most successful presidents in US history. And he will avoid his father’s sad fate: being a one-termer.