Larry Lindsey Was Right

...The mortgage refinancings that follow every interest rate reduction take 6090 days to arrange, so the extra cash from reduced monthly payments, or from extracting equity from homes that seem to be worth more every month, will start reaching consumers' pockets about now and into the first quarter of the new year...

...And in the near term, these costs are, as economists like to say, non-trivial...

...The pity of it is that the hand-wringing by the president's political team about the economy's condition is not rooted in the reality of what is happening beyond the Beltway...

...Investment in software and equipment is rising modestly, and outside of the troubled airline and energy sectors, capital spending grew at double-digit rates in the last quarter...

...But Ari Fleischer had it right when, announcing the O'Neill and Lindsey resignations, he said, "It is fair to say the president looks at the economy as a matter that is bigger than any one person or any one expert...

...So both in order to get the economy not only growing, but growing fast enough (at around 4 percent, probably) to bring down the unemployment rate, and to insure against the emergence of longer-term problems before 2004, the White House team wants to "do something...

...Moreover, the die is already cast...

...The economy grew at a 4 percent annual rate in the last quarter and will probably grow steadily in 2003, after what may be a bit of a slowdown in the last quarter of this year—although even that is not certain, given the robust start to the Christmas shopping season...

...The president intends to offset any tax cuts he can get now with reductions in spending later...

...Lindsey also framed the tax cut that was the centerpiece of Bush's successful campaign for the presidency, and helped push it through Congress—"America's first meaningful income tax cut since the 1980s," notes Amity Shlaes in the Financial Times...

...The White House has banned the use of the word "stimulus," since it implies that the economy is not doing too well...

...She goes on, "In the context of the goals laid out for him in 2000, Mr...

...But Lindsey, who was a colleague of mine at a Washington think tank and whose zest for intellectual combat I find attractive, is the economist who got it right...

...What worries political types in the White House is the possibility that all of the above indicators of a growing economy will matter little if the unemployment rate doesn't start coming down well in advance of the 2004 elections—far enough in advance to reassure voters that their futures are secure, and to let the glow of "feel-good" suffuse their psyches by the time they enter the voting booths...

...Indeed, so strong is the improvement in productivity that many companies can meet the increased demands of their customers with fewer workers...

...Existing cuts can be brought forward and made permanent, but that hardly constitutes a change in policy, since it has long been the president's intention to do just that...

...Worse still, almost nothing the president gets from Congress can do much to stimulate the economy...

...And this good news is compounded by still more good news: Productivity gains continue to surprise on the upside...

...Which brings us back to Snow and Friedman, both long-time exponents of balanced budgets...

...If Bush can pull off that trifecta—lower taxes, more growth, and an eventually balanced budget—he just might be able to anoint his successor in 2008...

...Consumers are carrying a fairly heavy, although not unbearable, debt load, and might suddenly decide to rein in their spending, which accounts for about 70 percent of the economy...

...And Lindsey, about whom more below, did love the intellectual excitement of a good argument so much that he was not always sensitive to the ego-damaging consequences of his triumphs over the lower-IQ types that people the halls of Congress...

...But what...

...They will be hard pressed to explain to congressional Democrats and fiscally conservative Republicans just why they have become converts to tax cuts in a time of budget deficits...

...Since it is the president who will determine just what he wants to put to the Congress when he delivers his State of the Union message, most likely on January 28, the policy implications of the switch from Paul O'Neill to John Snow at Treasury, and from Larry Lindsey to Stephen Friedman at the National Economic Council, won't affect Bush's "stimulus"—oops, make that "growth"—package...

...More important to those White House advisers now in 2004-campaign mode is the fact that a plurality of Americans (48 percent, according to the latest Wall Street Journal!NBC News poll) want strengthening of the economy to be at the top of the president's priority list, that 45 percent are unhappy with Bush's handling of the economy (while 47 percent express satisfaction), and that as many Americans think the country is on "the wrong track" as believe it is "headed in the right direction...

...Taxes have already been cut so that, along with increased spending, the budget has moved from surplus into deficit, and more cuts might, as Friedman is believed to fear, drive up interest rates and further discourage investment...

...By making these personnel changes the president has lent credence to Democratic charges that Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of regulatory studies at the Hudson Institute, and a columnist for the Sunday Times (London...

...It comes down to tax cuts and growth today, with reforms later to offset any shortfall after the tax cuts have worked their supply-side magic on the revenue side of the budget...

...The trade deficit, for instance, is now around 5 percent of GDP, widely thought to be the point at which the dollar will weaken, perhaps so rapidly that foreign investors will pull their money out of the country, forcing the Fed to raise interest rates to make dollar assets more attractive...

...Of course, to the extent that presentation trumps substance, there may be sense to the shift...

...Which they will, and soon...

...That's what the call to "reform" (read, partially privatize) Social Security will be all about, and what changes in Medicare and Medicaid will eventually be about—reducing the cost of the welfare state...

...The more farsighted worry, too, that some of the "imbalances" in the economy, imbalances that prey on the mind of Larry Lindsey, might just catch up with them before 2004...

...And there might be a war, with economic consequences no one can predict with confidence...

...These political signals swamp the economic signs that suggest adopting the policy of Ronald Reagan, "Don't just do something, stand there...

...The new team, appointed over the vociferous protests of the supply-side wing of the Republican party, will argue that Bush can please both supply-siders and the budget-balancers...

...The Fed has lowered interest rates, and announced that it is content to sit back and wait for the effects of the most recent reductions to work their way through the economy...

...With productivity rising, increased output and sales do not require massive new hiring...

...the stock market seems no longer to be on life support, as corporate profits in the third quarter beat last year's figure by a healthy 12.2 percent (the second strongest yearly gain since 1997...

...The appointment of Snow and Friedman might give the appearance of doing something, and that might have some political value...

...Even business investment "may finally be showing signs of life," to quote the Economist...

...Hence the coincidence of good economic numbers and a rising unemployment rate...

...O'Neill, who often said the right thing at the wrong time and in the wrong tone, is not the sort of guy you send to persuade waverers to support you...

...The reasons for O'Neill's forced exit need no rehearsing here...

...Exclude office buildings and other non-residential construction, and the capital spending picture brightens...

...Lindsey . . . did not fail...

...The housing market remains in a healthy-to-hot condition, with resales at their highest level in six months, median house prices up almost 10 percent over last year, and indices of expected demand for new homes at their highest level in two years...

...The short-term effect of any tax cuts that put more money in consumers' pockets, especially the pockets of upper-income consumers, will in part be diluted by increased savings...

...his economic program is somewhere between nonexistent and a complete failure, that the massive tax cuts he (with Democratic help) pushed through have not shored up the economy, and that Republican "trickle-down" economics might be wonderful for the rich but does nothing for the middle classes and the poor...

...There is no reason to panic about the economy—unless your father lost an election for seeming to be uninterested in economic matters, and for underestimating the time lag between an economic recovery and the emergence of that famous "feelgood factor" that is believed by the likes of Karl Rove to swing close elections...

...And there's the problem...

...He warned candidate Bush that he would be inheriting a recession, allowing Bush and Dick Cheney to repeat that warning on the campaign trail so they could hang the blame on Bill Clinton when they took office...

...and real incomes continue to grow...

...Consumer confidence is on the rise...

...Reducing taxation of dividends, another proposal likely to be on the president's list of tax changes, might encourage businesses to rely more on equity and less on debt to finance their expansion, but this is unlikely to have much effect on the growth rate circa 2003-2004...

...And that is the number on which the administration is fixat-ed—witness Snow's emphasis on jobs in his acceptance remarks: "We cannot be satisfied until everyone— every single person who is unemployed and seeking a job—has an opportunity to work...

...Never mind the president's current 62 percent approval rating: That merely matches the rating voters accorded George Bush the elder midway through what proved to be his only term in office...

...The unfortunate fact is that there is darn little it can do to steepen the growth path on which the economy is already set for 2003...

...Short-term incentives to invest, such as the much-discussed increase in depreciation allowances in 2003 to encourage business investment in the here and now, are said by 98 out of the 100 CEO-members of the Business Roundtable, once chaired by Snow, to be largely irrelevant to their long-term investment plans...

...Which is why he didn't skulk off, as did O'Neill, but was prominently seated in the front row when the president announced the appointment of Snow to the Treasury post, a sure sign that Lindsey remains on extremely good terms with the president...

...Still, any benefits of the change in personnel must be weighed against the costs...