Bush Aides Say Deficits Won't Hurt Economy
By Steven Pearlstein Washington Post Staff Writer
Wednesday, February 6, 2002; Page E01
President Bush's top economic advisers argued yesterday that the shift from federal budget surpluses to budget deficits would have no lasting impact on the growth of a U.S. economy that they expect to emerge from the current recession by the middle of this year.
R. Glenn Hubbard, chairman of the president's Council of Economic Advisers, said there was "little empirical evidence" linking federal budget deficits to higher interest rates or lower growth, a view diametrically opposed to that of Clinton administration officials and economists.
"A good economy leads to a good budget situation, not the other way around," Hubbard said in releasing the administration's first Economic Report of the President.
According to the report, the policies needed for a good economy include further cuts in personal and corporate taxes, fewer government regulations, a privatized Social Security system, more flexible antitrust enforcement, and further increases in international trade.
This year's economic report was covered in patriotic red, white and blue and suffused with the sort of conservative, market-oriented, supply-side economics last seen during the Reagan administration.
Hubbard and his colleagues -- Randall S. Kroszner of the University of Chicago and Mark B. McClellan of Stanford University -- predicted that the economy would begin to grow again by mid-year, as businesses begin to invest in new plants and equipment. They predicted that unemployment would peak at 6 percent in June but would remain at or above 5.5 percent for a year after that.
Looking out over the long term, the economic advisers argued that the increased gains in productivity during the 1990s represented a lasting, structural improvement in the performance of the economy, raising the potential growth rate by more than 1 percentage point a year.
Politically speaking, the most controversial section of the 446-page report concerned Social Security, which the economic advisers blamed for encouraging Americans to retire too early and discouraging them from saving for their own retirement. They also argued large surpluses in the Social Security trust fund have encouraged excess spending in other parts of the budget.
"The only truly effective way to preserve a Social Security surplus is to put it safely beyond the grasp of those who would spend it for other purposes, by depositing it into personal accounts," wrote the economic advisers.
Allowing individuals to put some of their Social Security contributions in private accounts that they can manage themselves, and pass on to heirs, represents the "next step in the natural evolution" of the government's largest and most popular program, they said.
With the Democratic-controlled Senate still debating legislation giving the president enhanced authority to negotiate new trade treaties, the economic advisers weighed in with somewhat controversial estimates of the current and expected benefits of further trade liberalization. They cite a University of Michigan study that calculated that the average American family would realize a one-time income gain of $2,500 from a new global trade treaty, albeit one spread out over a number of years.
At the same time, they asserted that the dramatic increase in imports into the United States has had no effect in widening the income gap among American workers -- a conclusion outside the consensus that has developed among labor economists in recent years.
The council's enthusiasm for free trade, however, was somewhat tempered by political realities when it came to eliminating U.S. barriers to imports of textiles and agricultural products. Such "sensitive sectors," according to the report, should be entitled to more gradual liberalization to give U.S. workers more time to adjust.
Yesterday's report also hinted that the Bush administration would not have prosecuted the antitrust case against Microsoft Corp. for monopolizing the market for personal-computer coperating systems.
Without making reference to the Microsoft case, the Bush economic team embraced the arguments made by Microsoft officials: that high-tech industries, by their nature, are prone to high concentrations of market share that quickly disappear under the pressure of relentless innovation. In such cases, the report argued, the rigid strictures of traditional antitrust enforcement should not be applied.
Tackling the twin problems affecting the health-care sector -- rising numbers of uninsured Americans and rapidly rising costs -- the Bush economists called for elimination of state regulations that, they argued, inhibit the competition necessary to hold down medical costs and insurance premiums. At the same time, they laid out an economic case for the president's proposed refundable federal tax credit as a way of encouraging low-income and self-employed workers to buy scaled-back health policies that cover treatments for major illnesses and routine preventive care.
© 2002 The Washington Post Company