Bush strategy: Spend now, pay later?

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Last updated at: (Beijing Time) Tuesday, December 02, 2003

Bush strategy: Spend now, pay later?

When US presidents seek re-election, they almost always try to rev up the American economy a year or so before voters go to the polls. George W. Bush is no exception.

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When US presidents seek re-election, they almost always try to rev up the American economy a year or so before voters go to the polls. George W. Bush is no exception.

And he has a big advantage over most of his predecessors, including his father: an obliging same-party Congress and an accommodating Federal Reserve.

It is little wonder that the economy is finally showing signs of a rebound. With three successive Bush-sponsored tax cuts, a surge in deficit spending and Fed Chairman Alan Greenspan willing to hold interest rates at 45-year lows, it seemed only a matter of time.

As the holiday season approaches, new economic indicators show a business activity firming up and rising consumer confidence and spending. The housing market remains strong, unemployment benefit claims are down, and stocks are rallying.

"It is not an accident that the third year of a presidential term tends to be the strongest year for the stock market," said David Wyss, chief economist for Standard and Poor's in New York. "The dark cloud here is that somehow, you've got to do something about the budget gap."

The budget, in surplus when Bush took office, is hurtling toward a US$500 billion annual deficit.

Failing to restrain spending now could increase the political pressure on Republicans to raise taxes in years to come.

But for now, the Republican-led Congress and the president are on a roll.

Some of the outlays stem from the September 11 terror attacks, the Iraq War and its aftermath. Bush has pledged to spend what it takes to protect America from future terrorism.

But the spending spree goes far beyond increases in homeland security and defence spending. It extends to domestic programmes that, in the past, Democrats championed and Republicans were criticized for trying to reduce or kill.

Almost three years into his term, Bush has yet to veto a single bill.

Last week, Congress sent him legislation to revamp the federal health programme Medicare, offering prescription drug benefits to 40 million elderly and disabled people. Estimated to cost US$400 billion over 10 years, the measure was eagerly awaited by Bush, who has promised older Americans help with drug costs.

Congress earlier enacted generous subsidies for American farmers. A US$373 billion catchall spending bill awaits lawmakers in December.

A US$31 billion energy bill, rife with tax breaks and grants that range from new subsidies for ethanol to help for a shopping centre, got short-circuited last week. But Republican leaders and the White House pledge to try again in January.

Bush had strived to avoid the mistakes of his father, who lost a second term in the White House in 1992 when voters perceived he was indifferent to a stumbling economy. But, in many ways, the current president is retracing steps taken by President Richard Nixon three decades ago, some analysts suggest.

To win re-election in 1972, Nixon ramped up federal spending and took other actions to juice the economy and financial markets, including imposing wage-and-price controls to combat inflation.

Nixon won in a landslide. But the economy soon collapsed in a harsh recession.

Inflation is not among Bush's problems. But artificial stimulation of the economy usually backfires.

"There is enormous stimulus in the system," says Robert Rubin, who was President Bill Clinton's treasury secretary. He cites the Bush tax cuts, mushrooming federal deficit, heavy spending on defence and the current low-interest rate environment.

"We have created a horrendous fiscal mess for ourselves," Rubin said, worryingly.

Deficit spending can help revive a stagnant economy and help create jobs - currently Bush's biggest problem.

But it can be dangerous if not reined in over the longer term, choking off growth and leading to higher interest rates. For now, Democrats have little choice but to rail against a spendthrift Republican Congress and its leader in the White House.

The Medicare bill is "a US$400 billion charge to our grandchildren's credit card so that President Bush can be re-elected," Democratic front-runner Howard Dean asserted at a candidates' debate last week in Iowa. For once, his rivals all agreed with him.

But Democrats have a dilemma. Any improvement in the economy, especially if accompanied by job creation, is bound to give an election-year boost to Bush and his party.

While Democrats can wring their hands over the legacy of budget deficits, "The green eyeshade look at the deficit is not going to resonate with voters," said Thomas Mann of the Brookings Institution.

"The context for this election is set by the health of the economy and the progress or lack thereof in Iraq. To the extent the economy grows rapidly, it will help make up for lost ground in the first three years of the Bush administration," Mann said. (China Daily)

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