In a presidential election year, most campaign pronouncements on the US economy deserve to be ignored. Yet the oil and gas industry can never ignore economic controversy. A hazard, in fact, looms. But it will be hard to spot in the dust kicked up by politics.
It's useful in years such as 2004 to remember that politicians need to promise riches, take credit for prosperity, and blame others for adversity. The nature of economics gives them broad latitude for this. Economics, complex and fluid as the subject is, does better at retrospection than prediction. And because economic causation is usually ambiguous, interpretation of even the well-measured past leaves great room for disagreement.
Frayed arguments
A rich example is shaping up in the clash between Republicans and Democrats. Typically, conflict centers on taxation, with Democrats inclined toward more and Republicans wanting less. Yet traditional arguments of both sides lately have frayed.
When former President Bill Clinton persuaded Congress to raise taxes early in his first administration, Republicans warned of stifled investment and stagnation. Yet the economy soon boomed, for which Clinton and fellow Democrats get to claim credit. Clinton's treasury secretary, Robert Rubin, has surfaced recently to reassert that the tax increase gave capital markets confidence that the administration took fiscal matters seriously. Markets, in fact, catapulted after the tax hike, and the deficit of the day vanished.
Yet that formula can't explain present conditions. Unlike Clinton, President George W. Bush persuaded Congress to cut taxes. His action nevertheless seems headed for comparable outcomes. The economy has rebounded.
Democrats, of course, say the recovery can't last, point dreadfully to a resurgent budget deficit, and clamor for a tax increase. Republicans say economic growth will shrink the deficit, as it did in the 1990s despite largely Democratic insistence that it could not. And Republicans warn that higher tax rates would foreshorten the current recovery for reasons that somehow didn't apply in the Clinton years.
Contradictions arise because political analysis attributes too much economic effect to specific fiscal causes. Clinton's relatively mild lift to tax rates might well have soothed investors enough to be, on balance, stimulative. The economy might not have needed the nudge, however. It already was recovering from a recession that followed the Persian Gulf War. And the presumably restored confidence of investors quickly gave way to exuberance in a dot-com frenzy that had little to do with contemporaneous fiscal policy.
Timing of the Bush recovery also is fortuitous from the Republican perspective. The terrorist attacks of September 2001 stunned an economy already withering from the dot-com bust. It was bound to recover at some point. To claim the tax cuts didn't help would be unreasonable. To claim they caused the rebound would be, too. Moreover, neither political party should argue that its economic victories could have occurred in full without the structural improvement to investment conditions that came with reduction of marginal tax rates and deregulation in the 1980s.
While politicians argue over whose recovery is better, the economy's primary hazard won't get much attention. But it relates to an issue that will.
Democrats will fret about reemergence of the federal budget deficit and argue for higher tax rates. Republicans will counter that the deficit grew naturally out of recession and war, that the economy can tolerate it, and that growth will contain it. Democrats with short memories will insist that national accounts can't be grown back into balance.
Deficit predictable
Both sides will be right and wrong. A deficit is a predictable and acceptable outcome of recent events. Deficits have been shown not to "crowd out" private investment to the extent once argued, mostly by Republicans. Notwithstanding alarms raised by both parties at different times, deficits don't always spoil economies. Tax hikes can aggravate them by stifling economic growth enough to reduce government receipts overall. And growth can, in fact, vanquish them, even when spurred by tax cuts.
The growth remedy doesn't work when federal spending increases faster than the economy generates new government receipts. That's the hazard now. Nondefense discretionary spending has zoomed. Both political parties deserve blame. This year, candidates will avoid the problem of federal spending gone wild. In 2005, the president, whoever it is, won't have that luxury.
