The Commerce Department announced that GDP had grown by 7.2% in the third quarter. Fueled by consumer spending and business spending, the record growth (unseen in 19 years) is a victory for the Bush administration, whose management of the economy has been under attack by Democrats and questioned by Americans. Bush and his team immediately jumped on the numbers as a sign that the tax cuts were working and the economy was on the rebound.
One of the key issues of next year’s election will be the economy, and in light of the recent GDP numbers, Bush’s prospects seem good. However, with 2.9 million jobs lost, and recent announcements of more layoffs and significant mergers, all the positive GDP growth numbers won’t dispel the unease most Americans feel about the economy without significant improvement in job creation.
Furthermore, the biggest factors contributing to the 7.2% were interest rates and child tax credit refunds. With the record-low interest rates, a flurry of mortgage refinancing allowed homeowners to keep more of their after-tax income. Tax rebates gave them cash on hand. Both were used to purchase durable goods such as cars (helped by low interest rates as well as dealer incentives and rebates) and appliances. In other words, consumers took advantage of present conditions to borrow against the future. It is unclear whether consumers will be able to keep up this pace of spending—how many cars do you need, especially when your job may be at risk?
Not to mention the fact that the bulk of the tax cuts went to trimming marginal rates of the highest earners as well as cutting the capital gains and estate taxes of the wealthy. This creates a structural revenue loss for the federal government. With heavy spending on Iraq occupation and reconstruction contributing to the deficit (and somewhat to economic growth), the federal debt will continue to expand, funded by more and more borrowing.
Why is this bad? Federal borrowing results in the diversion of capital from the private sector to the public. As debts increase to worrisome levels, investor confidence falls, and interest rates rise to offset risks, making it more expensive for individuals and corporations to borrow, thus discouraging spending. Furthermore, taxpayer dollars will have to go toward repayment of this debt in greater and greater amounts, reducing the amount of public investment in the economy on top of private investment. As the job base of the country crosses borders and oceans in search of lower operating costs, the nation will lose its primary source of revenue.
Like all of its policies, the Bush administration’s spending and tax policies cynically rely on disaster to be averted until after the next election. This is a dangerous game—both for the country and the administration. The next 12 months will show how well they come through.
Economist.com | America’s economy roars ahead
