Commentary: While Washington Fiddles...

The Federal Reserve cuts interest rates by a half-point, sending disappointed investors into a selling frenzy. As power blackouts ripple across California, the OPEC oil cartel announces a 4% cut in production. Japan slashes interest rates to zero in a desperate bid to pull the nation out of a prolonged slump. Meanwhile, nervous European finance ministers lower their growth forecasts to reflect a malaise that increasingly seems stamped "Made in the USA."

So what's Washington doing while the world's financial fabric frays and risks of a painful U.S. downturn grow? Debating. Mulling. Maneuvering. Even as an increasingly urgent chorus of voices outside the Beltway insists that the Bush Administration and Congress need to come up with a fiscal stimulus package pronto, few in Washington are acting with anything remotely suggestive of impending danger. Instead, Bush continues to push for a tax cut that most agree won't benefit the economy for at least a year, and Congress is content to play political "gotcha." Laments Senator Jon Corzine (D-N.J.): "I don't feel a sense of urgency on the Hill." Adds Jose I. Gonzalez, CEO of Perishables Group International LLC, an Atlanta-based importer: "People are still playing politics."

Bizarre as it may seem to many with business ties, the gulf between the real economy and Washington's insular political culture has seldom been greater. Up to now, many of the city's pols seemed confident that a benign spirit--Saint Alan of C Street--would ward off the evil of a recession. But over at the Federal Reserve, Greenspan's halo has slipped. Despite three successive moves to cut interest rates by half-point increments, the chairman's predictions of a quick rebound from an inventory correction seem less and less credible. With the markets' faith in the Fed ebbing and a barnstorming President Bush passing up no opportunity to tell Americans just how rotten things are in River City, policymakers are at a unique point: No single locus of confidence has emerged to calm investors and shore up consumers' faith in the economy.

Treasury Secretary Paul H. O'Neill, a Greenspan pal, insists the country is not in a recession and has warned that tax cuts don't pack much counter-cyclical punch. But his White House counterpart, economist Lawrence B. Lindsey, takes a darker view, noting that if the country isn't mired in a classic slump, it sure hurts like one. A chronic bear who once warned of a U.S. financial bubble for three years, Lindsey believes the economy is in for a lengthy period of financial distress.

STALEMATE. Because their views differ, the President's advisers are having a hard time shaping a response to the deteriorating situation. Talks are intensifying, says a Bush economic official, but "No one is panicked and saying, `Oh s---, we've got to do something today."' Still, "there is a sense of, `where's the bottom,' where is this thing going?" The upshot: Other than musing about some as-yet-unspecified acceleration of the President's tax-rate reductions, the Bushies continue to insist the structural reforms they outlined over a year ago are still warranted today.

While the Bush team debates just how bad things are, a President obsessed by his father's infamous tax flip-flop seems intent on consistency, above all else. Bush increasingly is pinning his Presidency on enactment of his $1.6 trillion tax package, an amalgam of across-the-board cuts, targeted credits, marriage-penalty relief, and elimination of the estate levy. Bush crafted this package during the campaign for complex reasons: To fend off an expected primary election charge from supply-sider Steve Forbes (top-tier rate cuts); to appeal to social conservatives (child-care credits and marriage-penalty relief); to woo small-business-based economic conservatives (death to the "death tax"); and to lure blue-collar workers (a new 10% bottom rate).

But is this the formula that's needed now, in an economy where consumer spending may be the last linchpin holding the financial system together? Maybe not. "Urgent tax cuts are needed to replace the wealth lost in the stock-market decline," says Albert M. Wojnilower, a consultant for the equity firm of Monitor Clipper Partners. "They are needed to forestall a [Japan-style] shift toward savings by households, which would pose serious threats to the economy."

Decoupling tax cuts, though, from the rest of his package might upset the GOP coalition and look like a retreat from a major campaign pledge. So Bush has yet to assent to radical surgery. Indeed, some White House aides have signaled a willingness to look at congressional initiatives that would speed up rate cuts and ax other parts of the package, no one knows how flexible Bush will be.

Congress isn't helping matters much. Hill Democrats and Republicans continue to cluck about the economy while playing political games. The GOP game: Loading a raft of worthy-sounding tax cuts onto the basic Bush platform, then making Democrats vote against them as proof that they're anti-entrepreneur and antifamily. The Democratic variant: charging that the GOP plans are giveaways for the rich that will gut education, Social Security, and Medicare.

But wait--aren't politicians supposed to be acutely sensitive to the pain inflicted on farmers, small-business owners, and average working stiffs? Yes, but in a New Economy slump, the traditional indicators pols glom onto aren't in the danger zone yet. For instance, since this is an investment-led downturn, unemployment has barely budged. The February rate: 4.2%. Obviously, joblessness is a lagging indicator. But its absence seems to be one reason Americans aren't panicked by the current slump and Washington isn't feeling the heat.

Similarly, global over-capacity and tech-driven innovation have combined to put downward pressure on prices. Thus, inflation has remained in check. One reason for politicians' torpor, says GOP pollster Edward Goeas, is that many of "the economic numbers look to be fairly good, even as the stock market looks bad." Adds Martin Regalia, chief economist of the U.S. Chamber of Commerce: "There is a major disconnect between Wall Street and Main Street. People are buying homes and cars. What they are not buying is stock."

Because of this schizoid split, many grassroots entrepreneurs have not yet joined manufacturing and tech CEOs in screaming "Recession" to their elected officials. Barry Rogstad, president of the American Business Conference, a group representing startup companies, says that although his members are moaning about a weak economy, "I don't feel a sense that the bottom is falling out." Instead, the dominant sentiment is: "Let's not do anything stupid."

Can Washington rise to the occasion with an intelligent policy response to the financial crunch? There is a glimmer of hope on the horizon. A number of Senate Democrats, among them Minority Leader Tom Daschle of South Dakota, Bob Graham of Florida, and former Wall Streeter Corzine, are exploring ways to design a high-impact tax cut. And on Mar. 21, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) told BusinessWeek he wants to act faster to get money into the hands of taxpayers. He'd be willing to move immediate tax relief of up to $60 billion--largely through rate reductions--through his committee by early May. "We need to stimulate the economy right now," he says.

White House officials are still playing it close to the vest, but Bush's advisers are having intense discussions over what one aide describes as a "rifle-shot" rate cut that would provide quicker stimulus. Also being explored: a one-time tax rebate that could put money into consumers' hands fast. With manufacturing in a recession for six months and the service sector weakening, the business cycle is probably too far advanced for tax magic to help much with the root causes of the slowdown. But both the Bush folk and business economists say that at this point, fiscal policy has become more about building confidence than anything else. Says the Chamber's Regalia: "The real problem is psychology." And the real answer seems to be that maybe it's time for Washington to stop the posturing and try to do something constructive.

By Lee Walczak

With Rich Miller, Howard Gleckman, Richard S. Dunham, and Lorraine Woellert in Washington D.C., and Ann Therese Palmer in Chicago

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