December 10, 2001

Donald Lambro

     Glenn Hubbard, chairman of the President's Council of Economic Advisers, thinks the economy will recover on its own without a stimulus package and that President Bush will choose that remedy if Congress sends him a bad bill.
     Mr. Hubbard, a free-market economist who usually steers clear of political rhetoric, laid down some markers last week that were aimed at Democratic Leader Tom Daschle. The political leader has done everything he can to kill or at least delay the president's tax-cutting economic-recovery plan.
     His line-in-the-sand warnings were part of a stepped-up White House offensive in the political battle over the president's economic agenda. That offensive began when White House economic adviser Larry Lindsey called Mr. Daschle's foot-dragging on the most pressing domestic priority in the country a shameful "abdication of responsibility" in a time of war and recession.
     Thousands of workers lost jobs, mortgage foreclosures were high, factory plants closed, personal incomes were flat, and the economy was contracting — "and Daschle's top priorities are the farm bill and a railroad-retirement bill that have zero priority right now," Mr. Lindsey told me.
     Mr. Lindsey's surprisingly political attack, delivered under orders from the White House high command, was Phase One in the administration's drive to get a stimulus package passed that can quickly energize the ailing economy.
     A week later, Mr. Hubbard fired the second shot in the president's offensive. His blunt message: Send Mr. Bush an anemic stimulus bill without accelerated tax-rate cuts, and he will veto it and take his chances that an already resurgent economy will bounce back early next year, beginning in the first quarter.
     "If what the president were presented here was a whole set of proposals that on net had very little stimulus, he may be well advised simply to let the economy recover on its own," Mr. Hubbard told me as congressional leaders began negotiations on the bill late last week.
     "We think accelerating the tax cuts is a really important part of the package. My concern would be that if you got a package that contained that, but added a great deal of new spending, on balance it would be difficult to ask the president to consider it seriously," he said.
     In fact, under those circumstances, Mr. Hubbard said he "would urge the president not to sign it."
     As for Mr. Daschle's so-called stimulus plan, which contains no tax cuts for people who pay taxes, "it would have very little stimulus effect and arguably a negative effect" on the economy, he said.
     Mr. Hubbard said "a real stimulus bill" that accelerates the Bush tax-rate cuts is needed to fuel faster growth, although he believes the economy can come back on its own over a longer period.
     He now thinks the recession will be "shallow and short," and that the economy will rebound in the first three months of 2002, leading to "robust growth in the last half of the year."
     The consensus-growth forecast among blue-chip business economists for the first quarter is about half a percent, an estimate Mr. Hubbard considers "reasonable."
     Indeed, he says there are recovery signs that the worst is over, except for the unemployment rate, which is a lagging statistic that won't turn around for some months.
     "The financial markets are relatively optimistic. I think there is reason to believe that the capital overhang, on balance, is unwinding, so that investments should pick up next year. Consumer spending remains robust. So, on balance, there is a reason for optimism," he said.
     Senior White House officials say that the real motivation behind Mr. Daschle's bitter opposition to the Bush stimulus bill is purely political. He wants the recessionary economy to last well into next year to give the Democrats a major issue in the midterm elections. But it looks like the nation's $10 trillion economy has plans of its own that will foil his gambit.
     Last month's big jump in the National Association of Purchasing Managers' index, which tracks manufacturing, was twice what analysts expected and one of the largest one-month increases in NAPM's history. Factory orders are way up. So is residential and nonresidential construction, fueled by low borrowing costs, which saw a nearly 2 percent increase in October.
     With the country still hurting from the economic collapse triggered by the September 11 terrorist attacks, it is hard to see Congress adjourning without passing a stimulus bill. And, clearly, a faster economic recovery will be critical to the GOP's drive to hold on to the House, retake the Senate and keep gubernatorial losses to a minimum next year.
     But the strong signal from a newly emboldened White House last week is that the bill has to have real tax-cutting incentives for growth. Otherwise, it's no deal.