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National Perspective | WASHINGTON OUTLOOK

Saddled With the Sagging Economy He Evoked, Bush Now Must Pony Up

March 26, 2001|RONALD BROWNSTEIN | Ronald Brownstein's column appears in this space every Monday

With the Dow and the Nasdaq falling out of orbit faster than the Mir space station, President Bush last week seemingly awoke to a sudden realization: If the economy crashes, he's now the one locked in the pilot's seat.

Ever since his election, Bush has been highlighting bad news in the economy with an odd glee. Critics complained that he was frightening consumers, thus deepening the problem he decried. But the White House seemed to believe that if the president convinced Americans the economy was sick, they would more likely accept his $1.6-trillion tax cut as the cure.

Last week, with the stock markets in headlong retreat, the White House apparently concluded that Bush may have been too successful at spooking America. So, in a metal-grinding shift of gears, he used a joint appearance with Japanese Prime Minister Yoshiro Mori to cross back onto the sunny side of the street: "I'm very confident about our economy," Bush insisted. "I know it can beat expectations."

Bush has more than a passing interest in how that prediction turns out. Understandably, Americans so far don't give the new president much credit, or blame, for the economy--growing economic anxiety hasn't eroded Bush's job approval ratings. But White House aides recognize that there's a day coming soon, when, for better or worse, Americans will hold Bush accountable for the economy's performance.

"People have a common-sense view. They understand that what is happening now has been in train for a while. Bush is not responsible for it, he's still new, his policies have not even been put into effect," one White House aide says. "But at some point, probably right about the summer, you reach a tipping point and it's on your watch. Then it becomes our economy whether we want it or not."

That prospect is adding a new sense of urgency to the tax debate, not only for the White House but also for the congressional Republican majority. For months Bush has been portraying his tax cut as an immediate economic tonic. But that argument may have been more a talking point than a genuine conviction; the plan is phased in so slowly that even Treasury Secretary Paul H. O'Neill has acknowledged it is unlikely to have much short-term impact.

Now though, Bush and congressional Republicans may genuinely need some way to jump-start the economy before voters go the polls in 2002 for the midterm elections. Gary Schlossberg, a senior economist at Wells Capital Management in San Francisco, says that Republicans trying to maintain control of Congress next year could be fighting against an economic undertow. "There is a very good chance the economy is going to be sluggish," he says. "Whether or not we are in a full-blown recession remains to be seen. But we could see a repeat of the 1991-93 experience where we are improving but people just don't feel it."

The paradox is that, even as the slowdown creates a greater need for Bush and the congressional GOP to stimulate the economy, it could leave them with less means to do so. From all corners, Republicans uneasy about the economic news are offering ideas to expand and accelerate the tax cut: cutting capital gains taxes, making the children's tax credit more lucrative for working-poor families, phasing in Bush's cuts in marginal income tax rates more quickly. The problem is that all of these ideas add to the plan's $1.6-trillion price tag.

Yet, even as the urge to do more faster threatens to swell the plan's cost, the slowdown could shrink the federal surplus available to fund it.

Privately, O'Neill has been telling senators that this spring the administration could project a 10-year budget surplus even larger than the current $5.6-trillion estimate. But the gimlet eyes on Wall Street are dubious. Several investment houses have been revising downward their short-term surplus estimates and voicing greater skepticism about the rosy long-term projections. "2001 may still look reasonably good, but to argue that the surplus is going to widen from there with the economy struggling . . . is questionable," Schlossberg says.

Some White House aides have suggested the administration might be willing to plunge the budget back into deficit to finance a tax cut. But most Republicans on Capitol Hill agree with the GOP Senate leadership aide who calls that idea "political seppuku." That's Japanese for ritual suicide. Here it translates into pressure, in the Senate at least, to avoid a tax cut large enough to risk the suicide leap of future deficits.

These conflicting urges--the desire to goose the economy and the fear of a shrinking surplus--are shaping the next stages of the tax debate. They help explain last week's Republican initiative in the Senate to tack onto Bush's long-term rate cut plan an immediate one-year, $60-billion tax rebate while deferring action on the Bush proposals with the least economic impact: his provisions to eliminate the estate tax and reduce the marriage penalty.

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