William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

There was bad news for the White House and the Republican Party in the Associated Press-Ipsos poll on public attitudes conducted Feb. 6-8. By a 61-35 percent margin, respondents said that the country was on the “wrong track,” and by 57-40 percent disapproved of the way President George W. Bush is running the country. Those surveyed also disapproved by a margin of 61-35 of how the Republican-controlled Congress was handling its duties, with a plurality of 47 percent saying things would be better if the Democrats were in charge. With Congressional elections only nine months away, the public could make that change if their dim view of the GOP persists.  

Perhaps most perplexing to Republican leaders is that by 58-40 percent, those polled disapproved of how the Bush administration is handling the economy. A Gallup Poll conducted during this same time period also found a 56-40 percent disapproval score for economic policy.

The White House trumpets low unemployment (4.7 percent), rising real per capita after-tax income (up 7.9 percent since January 2001), booming housing construction, and low inflation.
According to the 2006 Economic Report of the President, released Feb. 13, the future never looked brighter. How can people not be happy? Perhaps because the selective reciting of statistics in Washington does not pay the bills in Peoria.

Part of the problem with Bush administration stats is that they measure from the bottom of the 2001 recession rather than from the state of the economy before the recession.  The recovery from the recession has actually been very slow, even though the recession was shallow.  This is because the recession has masked some very negative structural changes in the economy which counter-cyclical policy – tax cuts, increases in government spending, and money creation by the Federal Reserve – is not designed to remedy.

Only 2,093,000 total jobs were added over the five years (2000-2004), a gain of only 1.58%, the weakest five-year increase on record.  Only half of these net jobs were in the private sector, that part of the economy supposedly subject to the most stimulus in the Bush program (tax cuts and low interest rates).  The other half came from increased government employment, not exactly where a conservative Republican administration would want it.  Though the Labor Department hailed the creation of 193,000 payroll jobs in January, this was 40,000 less than most private sector economists had predicted and an indication that the economy is slowing.

Manufacturing has lost 2.9 million jobs, with losses slightly worse in durable than non-durable goods.  There have been job losses in every major industry.  A housing boom should boost durable goods production, except that too many of these items are now imported from overseas.  And much of the construction work is done by illegal immigrants, who will work for much less than skilled American craftsmen.

There has also been a lost of 209,000 private-sector white-collar supervisory positions in line with the loss of blue collar workers. These well-paying jobs have been replaced by lower-paying service sector jobs in health care, social work, education, and restaurants. Unemployment is low because people have to work to eat, so they take whatever jobs are available. Even so, since Labor Dept. stats do not count people who have been out of work for more than six months, the kind of unemployment that affects how people and families actually live is still high. The Labor Department reports there are NOW over 5 million of these “discouraged workers” no longer counted as being in the labor force, but who still want a job.  The editors of The Economist magazine of London, whose views on policy do not differ fundamentally from Bush’s, have calculated that real unemployment in the United States is closer to 8 percent.  Adults are not participating in the job market at 2000 levels (67.4 percent then versus 65.5 percent now), and total hours worked in 2005 were still less than in 2000.  Additionally, the stagnation of wage and salary levels for most Americans does not indicate a tight labor market.

Another disturbing fact, which undoubtedly underlies the negative Bush poll numbers, is that households drew down their net savings last year.  This has not happened since the Depression year of 1933 and indicates that the American people are trying to maintain their living standards without adequate income. The Bush approach of trying to boost “after tax income” by cutting taxes, rather than raising base income by creating better jobs, is a losing proposition.

In presenting the FY 2007 Budget to the Senate Finance Committee Feb. 7, Treasury Secretary John Snow argued for making the tax cuts enacted during President Bush’s first term permanent, despite an estimated budget deficit for 2007 of $354.2 billion. Though he claimed that the economic recovery is strong and deep, he still said, “Tax increases carry an enormous risk of economic damage.” This statement implies that the economy is not on a self-sustaining upward course, but is still dependent on heavy fiscal stimulus from the government.

Back when I was teaching economics at the University of Tennessee, the textbook used for the introductory sequence was the top-selling work of Campbell R. McConnell. McConnell was a follower of Abba Lerner, who had taken the Depression era doctrines of John Maynard Keynes to the extreme. Whereas Keynes believed in running deficits during a downturn to stimulate the economy, he also favored paying down debts when times were good, thus balancing accounts over the course of the business cycle. Lerner and McConnell believed deficits should be run all the time, without concern for any mounting debts. Indeed, they feared the accumulation of personal savings. They called their theory “functional finance,” the function being to continually stimulate an economy they did not believe could ever run reliably on its own.

This outlook was popular among liberal-left academics (like those who ran my department and made the textbook decisions) because it fit their notion that capitalism was an inherently flawed system whose internal contradictions required government management to overcome. Their view now seems to have been adopted by the Bush administration.

Putative conservatives cannot acknowledge the liberal lineage of their ideas, so they invented the new school of “supply side” economics.  But the only real difference is that while liberals favor creating deficits by boosting government spending on programs for their constituents, supply-siders want to create deficits by cutting taxes for their constituents. But it is the same political game – one based on a dismal view of the underlying economy.

Snow fell back on supply-side rhetoric, claiming “lower tax rates are good for the economy and a growing economy is good for Treasury receipts.  Indeed, our rate of economic growth led to record levels of Treasury receipts in 2005.” But a closer look at the composition of tax receipts disproves his claim.  According to the administration’s Office of Management and Budget, individual income tax receipts for 2005 were $77.3 billion less than in 2000.  The increase in overall tax receipts from individuals came mainly from social security taxes, which were not cut.  These fall mainly on middle and working class families, whereas income tax cuts help those in the upper income levels. Individual income tax collection is not expected to reach the 2000 level again until 2007.

Corporation income tax receipts have gone up, indicating where in the economy the real money is being made. Indeed, the Bush administration seems to think mainly in terms of how the corporate sector is doing. The new Economic Report, for example, downplays the negative household savings rate, arguing, “Personal saving is only one part of national saving. The personal saving rate does not include corporate saving in the form of retained earnings; but corporate saving adds to the wealth of corporate shareholders and supplies funds for investment.”

Snow himself acknowledged the flaw in his supply-side reasoning (inadvertently) when he told Senators, “In 2011 we will again reach, as a percentage of GDP, the levels we've seen over the average of the last 40 years.” Thus, it will not be until three years after Bush leaves office that fiscal behavior will get back to normal. And even then, Snow defines downward what is considered normal.

OMB projections for 2011 have tax receipts at 17.9 percent of GDP. Forty years ago was 1966. The average share of GDP collected in Federal taxes from 1966 to 2001 – the 36 years before the Bush tax cuts went into effect – was 18.3 percent.  Almost all the cases where the tax share was significantly lower were during recessions, when tax receipts declined due to reduced economic activity and high unemployment.  One suspects that Snow wanted to go back 40 years so as to be able to average in the period of “malaise” during 1973-1979, when the tax ratio averaged 17.9 percent. Tax receipts naturally jump when times are good and people are making money. The tax share of GDP averaged 18.5 percent during the vibrant 20 years from Presidents Reagan to Clinton. But during the 2002-2005 period, tax receipts as a share of GDP have averaged only 17.1 percent. This fact reflects the extreme nature of the Bush tax cuts, and the weakening tax base.

Government spending during this period has not been historically high as a percentage of GDP despite the Iraq and Afghan wars.  Indeed, it has run slightly less than the average of the 1990s – 19.6 percent versus 20.7 percent during 1990-2000. What has caused the budget deficits has been the drop in tax revenues.  Thus, in the Bush plan, budget deficits will continue out to 2011, and beyond.  This is another source of dissavings in the economy, as budget deficits destroy capital, decrease investment, and prevent Americans from reaching their full potential as producers of wealth.  The winners are those rival economies overseas where people do save, invest, and produce to wipe out American industries in cutthroat competition.

(Part II will follow next week.)

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