For President Bush, tax cuts have been an all-purpose elixir, a cure for budget surpluses and a bursting stock bubble, for terrorist attacks and boardroom scandals, for the march to war and a jobless recovery in peacetime.
Now, after three successive tax cuts, and after a record budget surplus has turned to a record deficit, the president faces an unenviable choice. He can either concede that his $1.7 trillion tonic has not worked as advertised, or he can insist that the economy is strong despite the slowdown in growth and job creation.
A previously published version of this article identified Stephen Gallagher as chief economist at the investment firm S.G. Cowen & Co. Gallagher works for the corporate parent, SG Corporate & Investment Banking. The original article appeared on Page A4 of today's Post.
Last week's news of stagnant job creation has revived the debate over the effectiveness of the tax cuts, the centerpiece of Bush's domestic program. Economists of all political stripes say the tax cuts did jump-start the economy, which was in recession from March to November 2001. But to many, that kick is starting to look more like a sugar high than a cure for the economy's underlying weaknesses.
On Monday, Morgan Stanley's chief economist, Stephen S. Roach, dubbed this "The Mythical Recovery," hooked on three drugs now in increasingly short supply: tax cuts, rising government spending and low interest rates.
"Lacking in the organic staying power of job creation and wage earnings, the U.S. economy has become addicted to the steroids of extraordinary monetary and fiscal support," Roach told clients. "But with policy levers pushed to the max, the lifeline of support is now dangerously thin."
Democratic White House challenger John F. Kerry pounced yesterday, releasing a report on "George Bush's failed fiscal policies" and unleashing former Treasury secretary Robert E. Rubin to decry the failure of the tax cuts and "the horrendous long-term fiscal situation" they have put the country in. The charge -- even if incomplete -- has the ring of truth, said Gregory R. Valliere, managing director of the bipartisan Schwab Research Group.
"The jobs figures allow Kerry to say that the recovery is sputtering and the tax cuts didn't help much," he said. "It's a credible argument now. Kerry can say for the next month that the tax cuts didn't work. And he can say that with some justification: The tax cuts worked for a few months, but the impact has faded."
But the administration has its backers. "Who knows what the economy would have looked like without the tax-cut packages?" asked Stephen Gallagher, chief economist at SG Corporate & Investment Banking. "We might not be happy where we are, but it likely would have been much worse."
With the election 83 days away, gasoline prices, the stock market, job-creation figures and economic growth are headed in the wrong direction for an incumbent who wants to run on accomplishments, prosperity and optimism.
Donald H. Straszheim, a former chief economist at Merrill Lynch, told clients of Straszheim Global Advisors Inc. yesterday that the job figures in particular are "potentially decisively bad for President Bush."
The economy has 1.1 million fewer jobs than the day Bush took office, making it more than likely he will join Herbert Hoover as the second president to see the nation suffer a net job loss on his watch. The economy is 7 million jobs short of the level the White House had predicted when trying to sell the tax cuts. And a 10-year budget outlook that in 2001 pro8ject8ed $5.6 trillion in surpluses now foresees $2.7 trillion in deficits, an unprecedented fiscal swing.
Republican strategists say Bush is so closely associated with the tax cuts that he has no choice but to defend them. Rather than acknowledging failure, Bush aides said, they plan to keep making the case that the president's leadership and the trio of tax cuts kept the recession of 2001 shallow and short, avoiding a double-dip recession and helped the nation recover from the attacks of Sept. 11, 2001, and the corporate accounting scandals of 2002.
Administration officials said they plan to explain the economy's straits by saying energy prices are creating a head wind on what is otherwise a fundamentally sound economy, and that the fundamentals of the economy -- including an unemployment rate of 5.5 percent -- have improved under Bush.
"The economy is strong, and it's getting better," Bush said in the Oval Office on Monday, repeating a months-old mantra from the campaign trail. "In spite of a recession, emergency, attacks, war and corporate scandals, we're growing, and growing quite substantially. We've added nearly 1.5 million jobs over the last 12 months."