I.O.U.S.A. (23 page)

C h a p t e r 5

THE LEADERSHIP

DEFICIT

After the Second World War we started running
budget surpluses and did that through the 1950s
and into 1960. Only in the past forty years or so
have we accepted that it ’ s a bipartisan thing not to
have fi scal discipline.

— Paul O ’ Neill

Do you think there is a risk of a recession? ” a reporter asked President Bush 43 at a press conference in September of 2007. “ How do you rate that? ”

“ You know, you should talk to an economist,

”

answered the leader of the free world, leaning on the podium, and laying on the “ aw, shucks ” Texas charm. “ I think I got a

‘ B ’ in Econ 101, ” President Bush continued with a chuckle.

“ I got an ‘ A, ’ however, in keeping taxes low and being fi scally responsible with the people ’ s money. ”

Since the Bush administration began in 2000, the U.S.

economy has been on a rollercoaster ride. Still, even if the 75

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76 The

Mission

United States was in recession between March and November

The Laffer Curve:

The core concept

2001, a report from the U.S. Congress Joint Economic
behind the supply-Committee showed that

“ the U.S. economy outperformed

side economics

its peer group of large developed economies from 2001 to
followed by

2005. The United States led in real GDP growth, investment,
both the Reagan

industrial population, employment, labor productivity, and
and Bush 43

administrations.

price stability. ” But, by the end of 2006, cracks were starting
The theory

to show in the fa ç ade of the U.S. economy. Fears that the real
suggests that

estate boom couldn ’ t possibly last forever, as many American
with tax rates at

home owners had believed, began to surface. The U.S. dollar
an optimum level,

continued its long, slow slump against other currencies, and
the government

can help grow the

interest rates began to edge up again.

economy out of

Up to this point, the Bush administration was follow-defi cits. Thus far,

ing the economic script set out by Ronald Reagan almost
the theory remains

20 years before. We talked to Arthur Laffer, who sat on Reagan ’ s
unproven.

Economic Policy Advisory Board. Arthur Laffer is most associated with the term
taxable income elasticity,
or what has become popularly know as the
Laffer curve.

Ultimately, the theory goes, government can maximize tax revenue by setting tax rates at a level low enough to spur economic activity and “ grow ” the economy out of any fi scal crises that may arise. If, for example, the tax rate is low and the economy grows, tax revenues for the government will increase.

Conversely, if taxes are high, there will be no capital for businessmen to reinvest in the economy; therefore tax receipts to the government will be low.

The theory is sound, but even Laffer admits it has its limitations. “ Sometimes tax cuts are good for the economy, ” he told us when we visited his offi ce in

We ’ re running a completely schizo-

Nashville,

“ sometimes they

’ re not.

phrenic tax and spending policy

Sometimes governments behave

right now. We ’ ve got a big gov-

excessively and raise taxes way

ernment - spending program, and

beyond what they should. ”

a small government tax program,

which is a recipe for defi cits as far

At the moment, “ we ’ re running

as the eye can see.

a completely schizophrenic tax and

— HARRY ZEEVE

spending policy, ” Harry Zeeve, the

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Chapter 5 The Leadership Defi cit
77

national fi eld director for the Concord Coalition, points out in the fi lm. “ We ’ ve got a big government - spending program, and a small government tax program, which is a recipe for defi cits as far as the eye can see. ”

The fi rst round of tax cuts, in 2001, were titled the Economic Growth and Tax Relief Reconciliation Act of 2001 and hoped to take the Clinton era surplus and put it back in the hands of American taxpayers. And it worked — for a while.

But by 2003, the United States faced a stagnant economy, falling employment rates, and two impending, expensive wars.

The administration believed that pushing through another round of tax cuts, the Jobs and Growth Reconciliation Act of 2003, would give the economy the boost it needed to grow its way out of any fi nancial diffi culties.

The second round of tax cuts were, by and large, opposed by economists — Bush ’ s own economic advisory board included.

In fact, in February 2003, approximately 450 economists, including 10 Nobel Prize laureates, signed a statement oppos-ing the Bush tax cuts. This petition of sorts urged the president not to enact the proposed tax plan as it would not only hurt the economy in the near term but deepen defi cits down the line.

The statement, released by the Economic Policy Institute, was printed as a full - page ad in the
New York Times
on February 11, 2003 and read as follows:

The tax cut plan proposed by President Bush is not the answer to these problems. Regardless of how one views the specifi cs of the Bush plan, there is wide agreement that its purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near term. The permanent dividend tax cut, in particular, is not credible as a short - term stimulus. As tax reform, the dividend tax cut is misdirected in that it targets individuals rather than corporations, is overly complex, and could be, but is not, part of a revenue - neutral tax reform effort.

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78 The

Mission

Passing these tax cuts will worsen the long - term budget outlook, adding to the nation ’ s projected chronic defi cits.

This fi scal deterioration will reduce the capacity of the government to fi nance Social Security and Medicare benefi ts as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after - tax income.

To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment. Such a stimulus plan would spur growth and jobs in the short term without exacerbating the long - term budget outlook.

In the end, the legislation was pushed through on May 23, 2003, by a tie - breaking vote from Vice President Dick Cheney.

What ’ s the Right Level of Government?

One of the most outspoken critics of this legislation was the Bush administration ’ s own Treasury secretary, Paul O ’ Neill.

Mr. O ’ Neill has a reputation for having a rather direct way of presenting his ideas and opinions — a trait that would eventually cost him his job.

In 2001, President Bush asked Mr. O ’ Neill to leave the private sector to join his administration as Treasury secretary. O ’ Neill, who has had a long and decorated career in Washington, having served in the Kennedy, Johnson, Nixon, and Ford administrations, was initially excited at the prospect of working under Bush 43.

“ I saw lots of things in our economy and our society that needed to be done, and I was encouraged to believe that Bush 43 was up for the diffi cult political things that needed to happen to make course corrections, ” he told us when we met with him in Washington, D.C., in the spring of 2007. “ Those c05.indd 78

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Chapter 5 The Leadership Defi cit
79

course corrections still include fi xing the Social Security and Medicare trust funds, and fundamentally redesigning the way the federal tax system works. I thought there was some prospect that President Bush would entertain the diffi cult political choices that needed to be made in order to act on these things, and I had spent a lot of time thinking about these things over a period, the better of part of forty years, so I was anxious to have a go at it. ”