TOPICS > Economy

Bush Economics

August 30, 2004 at 12:00 AM EDT


PAUL SOLMAN: New York City last week, just before the Republican Convention hit town. We were in uptown Manhattan, on the campus of sculpture-rich Columbia University. On the day we visited, another group was assembling: The new class of the Columbia Business School.

The host of these students, meanwhile, was nice enough to take a brief leave from the festivities to make the economic case for another four years of President Bush, an obvious role for Glenn Hubbard, in that before he assumed the deanship here, Hubbard was the first chairman of the president’s Council of Economic Advisors at the helm during the recession and 9/11.

GLENN HUBBARD: The economy got hit with almost an unimaginable series of negative shocks, and yet bounced back very well. In part, in large part, that’s due to the private sector’s energy entrepreneurship and drive.

But public policy played a role — the president’s policies and also Federal Reserve policies. I think going forward we’re likely to see from the president an emphasis still on promoting economic growth and recovering the job market.

PAUL SOLMAN: The job market: We’ve heard for a year and a half now or more the term “jobless recovery.” How come there hasn’t been more job growth?

GLENN HUBBARD: Well, first of all, we have had substantial job growth. The puzzle has been why the job growth hasn’t mirrored the GDP growth, which has been very strong thus far. I expect that to change. I expect us to see job growth, payroll growth picking up steam quite a bit by this fall at the end of the year.

PAUL SOLMAN: What role have the tax cuts, which you in particular were associated with, played in what’s happened so far? Positive: Economic growth. Not so positive: Not much job growth.

GLENN HUBBARD: Well, I think President Bush’s tax cuts have played a very important role. First of all, again, with the shocks the economy got hit with, the tax cuts helped to shore up the consumer, revive business investment, and to revive asset prices.

And I think almost any of the economic modelers would say they played a big role coming into the recovery. I, like many economists, am puzzled as to why the job market hasn’t recovered as fast as output. But I believe that it will begin to soon, simply because we can’t have top-line GDP growth this high without very substantial payroll growth.

PAUL SOLMAN: Glenn Hubbard’s thinking and research as a Columbia economist has been hailed as a major influence on the president’s tax cut policy.

And though critics might interpret this New York minute we happened upon as prophetic — consuming today instead of saving for tomorrow — the Republicans would say that their economic program encourages the more proverbial behavior of this city critter, “squirreling away” savings for the future.

That is, taxes on income and investment discourage work and saving, says the administration. Therefore, cutting taxes on income, capital gains and dividends today will supposedly encourage savings for tomorrow.

Talk of tax cuts, meanwhile, took us briefly to a second location: For a whistle-stop in front of a nearby restaurant, a symbol of low-wage work at a time when wages have been widely reported as stagnating, even as taxes have been cut, especially benefiting those with high incomes.

One criticism has been that the tax cuts have amplified the inequality of wealth so that you’ve got, for example, recent data showing that the average wage has been stagnant even as some jobs have been created and there’s been reasonably substantial economic growth.

GLENN HUBBARD: Well, actually, the key, I think, is what raises wages in the long term for everybody, and that’s productivity growth. And I think what the president was trying to do, I think did do, was raise long term economic growth. That’s the key to the higher wages for everybody.

PAUL SOLMAN: Just down the block from the deli, as it happened, St. Luke’s-Roosevelt Hospital, a venue at which Hubbard was happy to pause to explain the administration’s economic strategy with respect to health care.

What is the administration’s view with regard to health care and its policy going forward?

GLENN HUBBARD: I think health care has been very important for President Bush. I mean, he certainly worked very hard to get very significant changes in the Medicare program.

The president has proposed consistently greater health care support for lower-income families through refundable tax credits. And the new health savings accounts, I think, are an absolutely fabulous idea for health care that has, of course, come as a result of the president’s leadership.

PAUL SOLMAN: The idea behind health savings accounts: To dampen health care demand by encouraging people to make health care spending decisions for themselves.

GLENN HUBBARD: They’re a way to get households more interested in purchasing high deductible insurance; that is, if you get very sick, insurance pays off, but for those smaller, routine bills, you’re on your own.

PAUL SOLMAN: You mean, because if you have a high deductible, then you’re going to think twice before you get the test that if you weren’t paying for it you would get as a matter of course.

GLENN HUBBARD: Well, exactly. And what that does is reduce overall health care spending. And think about it from a worker’s perspective. If I’m spending less in health care, my employer will take the money paid in health care and pay it to me in wages instead.

PAUL SOLMAN: There was one last stop we’d hoped to make, at Manhattan’s National Debt Clock, which we’d visited the last time a political convention was held in New York, in 1992.

Back then we were with Democrat Ira Magaziner, asking how candidate Bill Clinton would be able to afford the programs the Democrats were promising. Manhattan’s debt clock has since been dismantled, replaced by a clock chronicling the cost of the Iraq War. So we resorted to the Internet, where the up-to-the-second debt tab appears on numerous web sites.

The debt clock is approaching $7.5 trillion. Is that going to continue?

GLENN HUBBARD: What I’m more worried about as an economist are the deficits going forward ten or more years from now. And those deficits are almost entirely coming from the big entitlement programs, principally Medicare and also Social Security. The numbers that those deficits suggest are truly alarming.

PAUL SOLMAN: Well, but, I mean, you were the head of the Council of Economic Advisers during the time when we went from surpluses to deficits. So is this something the Bush administration can be proud of or defensive about it?

GLENN HUBBARD: Well, I’m not defensive for the following reason: The bulk of the reason that the economy went into deficit was a change in economic forecasts; that is, forecasts in the private sector and in the government in the late 1990s were much too optimistic about the government’s revenues, just as the stock market was too optimistic and many investors were. That’s the bulk of it.

Of the, say, half that’s remaining explaining the deficit, half of that is an increase in spending that happened, and the final quarter is from tax cuts. So I think you have to put it in perspective. What I think we need going forward are two things: One is substantial spending restraint, which the president has talked a lot about in trying to get pay-go rules back…


GLENN HUBBARD: Pay-go rules in the Congress are if you adopt a new spending program, you need to pay for it by either cutting something else or raising taxes to do it. But the big issue, really, is the long term. And the question is when the political process will be ready to deal with the massive cost overruns in the Medicare program and the Social Security program.

PAUL SOLMAN: Are you optimistic if there’s a Bush administration for another four years it will be more able to cope with that than a Kerry administration would?

GLENN HUBBARD: No question in my mind. President Bush campaigned in his first campaign on personal accounts and Social Security. He got enacted health savings accounts as a part of Medicare. It was a clear direction for reform. Sen. Kerry has been quite up front that he wants to expand these programs, not contract them.

PAUL SOLMAN: By now, Glenn Hubbard had to return to the Columbia Business School class of 2007. His fellow Republicans, meanwhile, were on their way to New York to help cheer on the policies that they say have helped the economy “turn the corner,” and to hear the president’s more detailed economic proposals, which he’s promised to unveil at the convention itself.