A sudden political panic over economy

Something close to panic is sweeping through Washington, as the nation's political leaders finally face up to the fact that the economy is as bad as it has been in a decade - and isn't likely to improve anytime soon.

All that partisan sniping about who lost the budget surplus? That's yesterday's spin. Now Democrats and Republicans are suddenly vying to see who can appear more concerned about the plight of average workers caught in a layoff-laden downturn.

It's as if everyone suddenly remembered the famous epigram of Bill Clinton's first presidential campaign: "the economy, stupid." The bottom line: Prospects for fiscal-stimulation efforts, such as a capital-gains tax cut or increased education spending, have likely brightened.

"What's got everybody [in elective office] scared ... is going into the 2002 election without a growth agenda," says Marshall Wittmann, senior fellow at the Hudson Institute in Washington.

That the economy remains in a perilous state is now beyond debate. Most recently, the surge in the jobless rate to a four-year high of 4.9 percent has increased pressure on both the White House and Congress to take some kind of action to spur the flagging economy.

Voters are becoming both more pessimistic about their economic future and less satisfied with Washington's handling of the economy. A new Christian Science Monitor/TIPP poll conducted Sept. 5-9 found that the overall economic optimism index fell from 54.4 in August to 52.1 in September, an eight-month low. (A rating of 50 is neutral, signifying Americans feel neither positive nor negative about the economy.) Optimism about federal economic policies (a subset of the overall index) showed a similar decline, from 55.8 in August to 52.7 in September.

President Bush appears to be well aware that his father lost a reelection race in 1992 at least in part because voters perceived him as remote from their everyday pocketbook concerns. After the unemployment figures were announced Friday, Mr. Bush stepped before the cameras for a brief appearance that heralded no new policies, but was replete with Clintonesque pain-feeling rhetoric.

"The slowdown is real and affecting too many lives," said Bush. "I want the American people to know we're deeply concerned about the unemployment rates, and we intend to do something about it."

In recent weeks, Democrats have been gleefully pounding on the president as the nation's fiscal situation continued to deteriorate. New predictions showing that the non-Social Security surplus has virtually vanished have generated many Democratic accusations that the Bush tax cut has reversed the black-ink responsibility of the Clinton era.

That line of political attack is certain to continue. As recently as this weekend, Senate majority leader Tom Daschle of South Dakota said that the administration's actions are directly responsible for the current slowdown.

"When you make the U-turn the president did last spring, you can expect a U-turn in results," Senator Daschle said in a broadcast interview.

But emphasizing the need for green-eyeshade surplus protection could put the Democrats in their own box. It could preclude any additional spending on social programs the party has long favored. The Democratic leadership has blamed Bush's tax cut for the disappearance of the surplus, but it hasn't called for the tax cut's reversal - in part because 12 Democratic senators voted for the tax cut's final version.

Some key Democrats are now breaking ranks to suggest further fiscal-stimulation efforts that would themselves likely spend Social Security-generated surplus funds. "We may need additional tax cuts to give lift to this economy," said Sen. Kent Conrad (D) of North Dakota, chairman of the Budget Committee, over the weekend. His preference, he said, would be another one-time tax rebate similar to the one that put checks in taxpayers' mailboxes, or a reduction in the Social Security payroll tax.

Sen. John Kerry (D) of Massachusetts, a potential presidential candidate in 2004, has expressed similar sentiments.

Lately, a little ranks-breaking has occurred on the GOP side, too. Sen. Pete Domenici of New Mexico, a key figure on the Budget Committee, has said he sees no harm in temporarily tapping Social Security surpluses to fund higher spending on defense, education, and other programs.

Prospects for a capital-gains tax cut remain uncertain. Though high on the agenda for House Republicans, Bush has been lukewarm on the idea, in part because it is easy to portray such a reduction as a giveaway to the rich.

Whether lowering taxes on the sale of stocks and bonds and other assets would deliver a fast enough jolt to the economy is also arguable. "The only kind of tax cut worth talking about is a temporary tax cut that will have an immediate impact," such as this year's rebate, says Robert Greenstein of the Center for Budget and Policy Priorities. Added government spending is a quicker fiscal stimulus, he says, because it flows directly into the economy, without any money going into personal savings.

Washington's new economic pessimism will make the fall's budget debate more complicated. The parties will be vying to see which can appear to show the most fiscal restraint, while at the same time stimulating the economy - a difficult balance.