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Another Intelligence Failure at the White House

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Dean Baker
San Francisco Chronicle, Feb. 17, 2004
San Diego Union-Tribune, February 12, 2004

In his annual report on the state of the economy, President Bush predicted that the economy would create 2.6 million jobs in 2004. As Democratic presidential contender Sen. John Kerry quickly commented, this jobs number must have come from the people who said that Saddam possessed weapons of mass destruction.

It is not that creating 2.6 million jobs is an especially impressive performance. The economy created 3 million jobs a year from 1996 to 2000. Furthermore, after three years in which the economy lost jobs, it would be reasonable to expect that there would be a sharp bounce back.

But, the Bush economy continues to defy expectations, always surprising on the low side. To hit the 2.6 million jobs target, the economy would have to create 215,000 jobs a month. The average over the last two months has been just 115,000. If there were evidence that the economy was picking up steam, then it would be reasonable to believe that the economy would make up for some months of weak job growth at the beginning of the year. Unfortunately, the evidence points in the opposite direction, the economy currently appears to be running out of gas.

The economy went into the second half of 2003 turbocharged by the third round of Bush tax cuts, coupled with an unprecedented boom in mortgage refinancing. Mortgage debt increased at an incredible $940 billion annual rate in the third quarter of last year, as families rushed to take advantage of the lowest mortgage rates in almost 50 years.

Families didn't only use cheap mortgages to buy homes, they also borrowed against their homes to buy cars and appliances, or to pay for remodeling and vacations. This spurt of consumption led to the extraordinary 8.4 percent GDP growth in the third quarter.

But in spite of this growth, few jobs were created. With the fuel of the tax cuts and the mortgage refinancing boom in the past, the economy seems certain to slow in the months ahead. The economy was still growing at a healthy 4 percent at the end of 2004, but with minimal job growth and wages barely keeping pace with inflation, workers are running out of money to spend.

Some economic analysts are banking on a big boost from tax rebate checks in the spring. This would be sort of a rebound from the tax cuts. The cuts were passed in June, but applied retroactively to the beginning of the year, so many workers had too much money withheld from their checks in the first six months of 2003.

While getting this money refunded will put some extra dollars in taxpayers' pockets, these refunds will be almost completely offset by higher capital gains taxes. For the first time since 2000, many investors had stock gains in 2003 on which they will have to pay taxes. If capital gains tax collections rise just halfway back to their pre-crash levels, it will mean an additional $40 billion in tax payments in the spring of 2004 compared to 2003.

Without a boost from tax cuts, most other factors are likely to push the economy down. Continuing budget shortfalls are forcing state and local governments to lay off workers and raise taxes. Huge overbuilding in commercial real estate has been pushing non-residential construction downward for the last three years. And, it is only a matter of time before the bursting of the housing bubble brings residential construction down from its record highs. Equipment investment may remain strong, but this will give more of a boost to the economies of East Asia than the U.S. economy.

In short, it is hard to see how President Bush is going to reach his target of 2.6 million jobs this year. It seems all but certain that he will be the first president since Herbert Hoover to lose jobs on his watch.

In setting goals for its economic policies, this is an administration that strives for mediocrity, and comes up short.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.