President Bush radiated calm and assurance about the troubled economy in his State of the Union message last week. "To bring our economy out of recession, we delivered the largest tax relief in a generation," our Harvard MBA president said, to loud applause. He later added, "Lower taxes and greater investment will help this economy expand." It's a theme he will undoubtedly repeat to help sell the budget he submits to Congress this week.
It sure sounds as if the president has things under control. Not to worry, right? But actions speak louder than words, so let's look beyond the president's upbeat rhetoric at some numbers the economy and financial markets have posted in his first two years.
The highlights: U.S. stocks have lost almost $5 trillion of value since Bush took office two years ago, a mind-blowing decline. The market has fallen more (in percentage terms) in Bush's first two years than in the first two years of any modern president, including Herbert Hoover, who was in charge when the Great Depression began. And you can't blame the Bush market on the trauma of 9/11: Stocks fell at a much faster rate from Bush's inauguration through Sept. 10, 2001, than they have since. Unemployment is up more than 40 percent (to 6 percent, from 4.2) since Bush took office, gigantic projected federal-budget surpluses have turned into deficits, and the dollar has fallen sharply against the euro. The good news: Interest rates have fallen, juicing consumer spending.
The president's response to our problems has been to propose tax cuts that offer little in the way of short-term stimulus. These cuts may -- or may not -- confer benefits in future years, when their full cost kicks in. The centerpiece: the controversial plan to make most corporate dividends tax-free to shareholders. Then there's his recent proposal to expand retirement accounts. His plan would boost tax revenue in the short term by ending deductions for some plans. But it will cut revenues in the long term, because retirees will be able to tap their accounts tax-free.
The dreary economic numbers make you wonder whether Bush's remedies have a chance of curing the patient anytime soon. His prescription -- cut taxes -- is exactly what he prescribed when the economy seemed healthy. With the patient not responding, he wants to cut taxes more. With Bush, it always seems to be tax-cut time. He's not the first president to want to cut taxes -- but he is the only president in at least 140 years (and probably ever) to suggest cutting taxes as we're heading into a war. This all makes for a troubling picture for anyone hoping the economy and the market will resume booming as soon as the war with Iraq is behind us. Sooner or later the economy will fix itself, because it always does. The question is whether Bush's policies will advance the recovery -- or delay it.
The White House declined to discuss any aspect of Bush's performance for this column. So we'll rely on public statements by R. Glenn Hubbard, head of the president's Council of Economic Advisers. Hubbard says, in essence, that our economic problems are caused largely by businesses not investing enough, rather than by the traditional problem of consumers not spending enough. To fix the problem, then, we should strengthen investment incentives. What Hubbard hasn't said -- but is inherent in his analysis -- is that sending one-time checks to millions of people won't get the country out of its slump. Sending checks to the masses is exactly what Democrats propose. Let's take a closer look at the numbers on the scoreboard, and see what they tell us about Bush's chances of winning this game.
The Stock Market
When Bush was sworn in on Jan. 20, 2001, U.S. stocks were valued at $14.7 trillion, according to Wilshire Associates. Last week's value: $9.9 trillion. Total decline: $4.8 trillion. The only fair way to compare the Bush market with other presidents' markets is to use percentages rather than dollars. Here, too, he leads the pack. According to a study conducted for this column by Aronson+Johnson+Ortiz, a Philadelphia money-management firm, the Standard & Poor's 500-stock index has fallen more in Bush's first two years than under any president since the modern stock market emerged. (AJO's data go back only as far as Hoover, enough for our purposes.) During Hoover's first two years, which included the Black Thursday crash in October 1929, the S&P fell 29 percent. Not as bad as Bush's 33 percent. (Through last week, the decline was 36 percent.)
You can't blame this all on Bush, of course. The market he inherited in 2001 had been inflated by the tech bubble that started popping in the spring of 2000. It was bound to fall. But he's been in office long enough to bear at least some responsibility -- you can bet he'd be taking the credit if the market were rising. He can't blame the problem on 9/11. AJO says the S&P 500 declined at a 28 percent annual rate from Bush's inauguration through Sept. 10, 2001, but at less than half that rate since 9/11. However you count, the market isn't buying his program. And in the long run, the market's pretty savvy.
The Federal Budget
When Bush was sworn in, Uncle Sam seemed to be awash in cash. The federal budget was running big surpluses; the non-partisan Congressional Budget Office projected a $5.6 trillion surplus for fiscal 2002-2011. Bush got his 2001 tax cut through Congress even though the only way to make the numbers work was to use 10 years of projected surpluses to support a tax cut projected to last only nine years. That's why the cuts are scheduled to end in 2010 -- which, of course, they won't. The fact that the president used this kind of "fuzzy math" to get what he wanted doesn't exactly inspire faith in the reliability of his numbers.
With the economy in the dumps, tax collections falling and federal expenditures ratcheting up, the projected surpluses have melted away faster than your 401(k). The Congressional Budget Office now projects a tiny $20 billion surplus for 2002-2011 -- and a $200 billion-plus deficit if you assume Bush's tax cuts won't disappear. This assumes no war, no further tax cuts and no stimulus spending. What a realistic number is, heaven only knows.
Bush's supposedly quick-hitting cure for the economy's malaise is twofold. First, accelerate his tax cuts and make them permanent, which he claims will put the economy (and thus the federal budget) on the road to recovery. Second, end the "double taxation" of corporate dividends. You can make an argument that Bush's plan will get companies to stop dodging corporate income taxes and will cure everything but warts. Given how the world really works, I don't buy it for a second. But even though this plan would probably produce economic benefits, it would take years to make an impact. This isn't what you need to kick the economy into gear today.
The Bushies have been arguing that federal deficits don't really matter, because no one can prove that rising deficits mean rising interest rates. But they do mean rising interest bills. Here's the dreary math. Mitch Daniels, the head of Bush's Office of Management and Budget, says the fiscal 2003 deficit could be $300 billion. But that includes the $175 billion Social Security surplus. (These surpluses were once supposed to be put in lockboxes -- which have turned into leak boxes.) So the government is really in the hole by $475 billion. Let's say Uncle Sam's cost of borrowing that vast sum is a modest 4 percent a year. That's $19 billion. This means that every year, we'll spend more to pay for the 2003 deficit than the $15 billion the president proposes to spend for his five-year AIDS-fighting initiative in Africa. Deficits do matter, especially if you care about bequeathing bills to your children and grandchildren. Bush certainly said he did in his State of the Union speech: "We will not pass along our problems to other Congresses, to other presidents and other generations."
Since Bush took office, Alan Greenspan's Federal Reserve Board has cut a key short-term interest rate, the federal funds rate, to 1.25 percent from 6 percent. Long-term rates have fallen some, but less than the short rates. That's because the Fed controls short-term rates but the financial markets set long-term rates.
People have argued that the Fed cuts haven't helped, because the economy is still so crummy. But consider what things would be like if rates hadn't been cut. There has been a refinancing boom in houses, brought on largely by low rates. Mark Zandi, chief economist of Economy.com, estimates that refinancing has put $420 billion into homeowners' pockets in the past two years. "That dwarfs any sort of fiscal stimulus," he says. And low interest rates have made it possible for car companies to afford interest-free financing. The refinancing boom and zero-interest cars have kept consumer spending healthy. And kept the economy afloat.
But the low-rate game seems largely played out. The refi boom is slowing, car sales are softening, and the Fed can't cut rates much more. So Bush can't count on lower rates to keep coming to his rescue.
The downside of low rates is that they make Treasury securities less attractive to buyers. They're especially unattractive to Europeans, given the dollar's 20 percent fall against the euro in the past year. (Total decline since Bush took office: 13 percent.) Foreigners help cover the federal deficit by buying Treasury securities -- and growing deficits mean we'll be increasingly dependent on foreign money. It's going to be increasingly difficult to lure foreigners who keep score in euros to continue buying low-yielding Treasuries that pay interest in depreciating dollars.
The dollar's decline means, in theory, that we'll be exporting more to Europe than we otherwise would because our goods will be more competitive, and we'll be importing less because European goods will be more expensive. In the long run, this strengthens our economy. In the short run, it could cause problems financing the federal deficit. If we have to raise rates to cater to foreign investors, it will be the beginning of the end of our financial autonomy. And that won't be a good thing.
None of this is to say that Bush is fated to go down in history as an economic failure like Herbert Hoover. It's only halftime; the game's not over. So far, the president has talked a great game but hasn't played anything resembling a great game. It's time to start watching what the scoreboard has to say, rather than relying on the mere word of the cheerleader in chief. Optimism certainly matters -- but the numbers are what really matter. And they're not good.
Newsweek researcher Lisa Bergtraum contributed to this column.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.