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Economic Delusion, Political Disaster

By JOHN KENNETH GALBRAITH

The New York Times
March 11, 2001









CAMBRIDGE, Mass. I am not, in my own view or that of others, a plausible political adviser to the Bush administration, but I would like to suggest that it could be on course for a powerful political disaster. Following a period of insane speculation, we are thought now to be facing a recession, possibly even, so far as there is a difference, a depression.

On this the new administration agrees; it has given its support for two measures for strengthening the economy. Both have proved useless in the past and now owe their acceptance to personal attractiveness and political convenience. They are reliance on the Federal Reserve and reliance on tax reduction for support to the economy.

The reliance on the Federal Reserve and its cuts in the discount rate proceeds from the wonderful convenience of having an action available that is above politics and much more mentally agreeable than anything of substantive value. Ever since 1913, the founding year of the Federal Reserve, there have been great hopes for the stabilizing effect of its actions.

The succession of boom and bust, or inflation and recession, has continued ever since. During the Great Depression, the Federal Reserve was wholly ineffective; during World War II, when inflation was a serious menace and we took life seriously, Federal Reserve action was simply set aside. The Reserve owes its continuing standing to the thought that bankers have some peculiar effect on the economy and, especially, to the exceptional convenience of having a remedy that can be simply announced, without legislators and without regard for the great complexities that govern economic behavior. Also, needless to say, it now owes much to the extraordinary theatrical talent of Alan Greenspan, the Federal Reserve chairman. To rely on the Reserve as a remedy for an emerging recession is optimism carried to the point of foolishness.

The other political threat to the administration comes from tax reduction. This, as support to the economy, was announced immediately by President Bush on taking office. Most of the benefit, as now more than amply agreed, goes to the very affluent. In an economic downturn, those so favored do not spend, because they have no particular need. That is an aspect of wealth. And given the uncertainties of the economy, they do not readily initiate or invest.

It is true that middle- and lower- income folk do spend, but they do not get a significant share of the benefit, and the very poor get none at all. And such expenditure as there is here goes for the daily necessities of life, not for the things on which recovery depends. To repeat, those of middle and lower income are not the beneficiaries in any case. The effect of tax reduction is not on the economy but on the pleasure and political gratitude of those who receive it.

Since the days of Herbert Hoover, who tried tax reduction with no result, depression or recession has been the political misfortune of government with the strongest political effect. After the Great Depression, the Republicans were out of office for 20 years. This sort of rejection is what the Bush administration, substituting the preference and enjoyment of the affluent for reality, is risking. If there is a recession and no remedial action beyond that of Mr. Greenspan and the lowered expectations of the Internal Revenue Service, the administration faces political difficulty, even disaster.

I repeat, it is not my tendency to render advice to a Republican president, but this prospect is sufficiently grim for so many that one should break even the best established rules.

John Kenneth Galbraith, a professor emeritus of economics at Harvard, is the author of "The Good Society."