How economic bad news came good for Bush

America's market downturn may help the Republican candidate to avoid repeating his father's fiscal mistakes in office.

Call him lucky Dubya. He is not president yet but any number of pre and post-election events have, somehow, gone George W. Bush's way.

Should he become president, there is yet another area where he may prove lucky. It is his wager that he can do something his father could not: deliver to his party the thing it desires most - tax cuts.

Consider the good fortune over taxes that has visited Mr Bush so far. During the campaign, the ghosts of Bush Past spooked the governor's team.

They recalled that George Senior had made his "read my lips, no more taxes" pledge a centrepiece of his 1988 campaign. But after that election, as the budget deficit widened and the Gulf war loomed, President Bush threw up his hands and raised tax in the early 1990s.

"Betrayal!", screamed Republican supply-siders. When, in the second half of Mr Bush's term, the economy moved into recession and the deficit swelled further, the president's reputation suffered again. By 1992 the hostility toward President Bush was so strong that Bill Clinton won the presidency on the "it's the economy, stupid" theme.

When his turn came, George W.Bush was determined to avoid the same mistake. He made across-the-board income tax rate cuts an important plank of his platform. The cut to the 39.6 per cent top marginal rate was included specifically to woo back the old Reagan economists. Mr Bush promised them that he would never, as "Poppy" had, dismiss their theories as "voodoo economics".

But even the supply-siders who supported the governor feared that he would not be able to make good his promise. This was because the economic weather was inauspicious for tax cuts. To be sure, the deficit had narrowed since Poppy's day. But there was still the problem of the good times of the 1990s.

Tax cuts are much harder to sell during good times. Political opponents tend to dismiss them as a sop to the rich, who are already gaining from prosperity. Economists mutter that they are unnecessary or, worse, that they represent a dangerous stimulus.

But tax cuts in bad times are another matter. In bad times, tax cuts are viewed, a&acu la Keynes, as a social good - a tool to improve the overall economy. The support of orthodox economists has always been crucial for tax-cutting legislation in America. Ronald Reagan would not have succeeded in his 1980s legislation without them. While Keynesians' tolerance of deficits is no longer respected, the theory that the business cycle is linked to tax levels is still alive. Unfortunately for Republicans, Keynesians generally will back lower taxes only when they make sense in Keynesian terms - to counter a downturn.

This year's tight election result brought another apparent blow to Mr Bush's tax-cutting chances. With the Republican majority in the House smaller than before and the Senate split, what chance could Reaganite "radical" tax cuts have? Without a strong majority, Mr Bush's opponents reasoned, he would have to content himself with tiny tax cuts, forgoing his promises about top tax rates.

But these tacticians forgot about Mr Bush's luck. For just as the political weather turned against the governor, the economic weather began to move in his favour. Each post-election week brought more troubling economic news. The Nasdaq plummeted further. Christmas spending now looks weak. Even more important, at least in terms of market and political psychology, has been the suddenness of the shift.

Bad news for the rest of America is proving good news for Dubya. The new urgency of the problem requires that he respond with a dramatic economic plan. And, of course, he does have a plan - his tax plan. The fact that pro-growth tax cuts have been in his playbook for more than a year even gives him an air of foresight.

By last week, as the negative news proliferated, some of the nation's economic gurus were already lining up to support - you've guessed it - Bush-style tax cuts. Thus, for example, James W.Coons of Huntington National Bank in the December 1 edition of Ohio's Columbus Dispatch: "The structure of the plan is key - elimination of capital gains taxes and reduction of marginal rates would inoculate the economy to a downturn."

Two factors make this turn of events even more serendipitous for Mr Bush. First, unlike his father or even the campaigning Bob Dole, Mr Bush is not burdened by a deficit, the traditional obstacle to tax cuts. Second, economists and politicians who formerly conceded that tax cuts might be appropriate to halt a downturn will look like hypocrites if they argue the opposite today.

There are even some suggestions that Mr Bush is thinking of building a broader tax cut coalition. According to gossip, he may name Felix Rohatyn, formerly of Lazard Freres and currently US ambassador to France, as Treasury secretary. Mr Rohatyn is famous among fellow Democrats for his mid-1990s declaration of support for growth-oriented tax cuts. Matters could be helped by the fact that Dick Gephardt, the Democratic minority leader in the House, has supported tax cuts in the past - back in the troubled 1980s - and was talking about them again over the weekend. Alice Rivlin, who served in the Clinton administration as Congressional Budget Office director and Federal Reserve Board member, also supported tax cuts for growth, albeit long ago.

All of which means that a President Bush's chances for looking like Reagan, rather than George Snr, have just improved mightily. It is still early days - the presidency has not even been decided. But one thing is already clear: a man who will be lucky to become president may be luckier still with his timing. What looked like a hard and controversial sell in campaign days is well on its way to becoming every economist's received wisdom.

© Copyright 2000 Financial Times

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