Bush's Economic Policies: The Bull's-Eyes and Busts

The tax cut is a huge success, trade policy a flop. Now, deflation looms, and antitrust law should be rewritten or scrapped

By Robert J. Barro

The Bush Administration's economic policy continues to be a mixed bag. Some policies work, others don't.

The biggest policy win, of course, is the tax cut of 2001, which continues to be a positive for the U.S. economy. It would have been better if the tax-rate reductions came into effect earlier, and if tax changes had been made to favor more business investment. Movement in these areas seems unlikely as long as the Democrats control the U.S. Senate. That might change come the November elections.

The worst policy moves so far have been in international trade (notably in steel, agriculture, and timber) and fiscal discipline (in education and health). The Administration seems also to be allowing the inquiries on corporate fraud to turn into witch hunts that will harm enterprise for a long time. Of course, the worst example is the reckless legal assault on the financial sector by New York Attorney General Eliot Spitzer. But I confess to amusement over Spitzer's attacks on the quality of stock-picking, such as Salomon Smith Barney's Jack Grubman maintaining for too long, at least publicly, a positive outlook on WorldCom Inc. Economists tend to think that the value of these kinds of stock recommendations--whether, for example, to go long or short on WorldCom when its stock price reached $3 or $1--is about zero.

Another concern is monetary policy. Throughout the Volcker-Greenspan era, the Federal Reserve has cut interest rates when inflation remained low and when the economy was weak, gauged especially by slow employment growth. This policy led to the extremely low federal funds rate--1.75%--that prevails today, leaving little room for stimulus through further rate cuts. At some point, monetary policy may have to shift from a concern with inflation to the avoidance of the kind of deflation that prevails in Japan. In particular, if short-term rates get close to zero and the general price level starts to fall, then the monetary stance cannot be judged as stimulative. Rather, low interest rates would just be a symptom of expected deflation, and the way to stimulate the economy would be to create positive inflation by printing money at a faster rate. In this environment, successful stimulus shows up as higher interest rates along with higher inflation. Japan is already in this situation, but the U.S. is not yet there. One hopes the Fed is prepared to cope with deflation, should it arrive.

I applaud the intervention into the strike-lockout of the West Coast ports, although earlier action would have been better for the economy. The International Longshore & Warehouse Union (ILWU), with membership of just over 10,000 semi-skilled workers, has used its muscle in the past to boost annual wages to over $100,000. Their current priority is to stifle the introduction of productivity-enhancing technology, which would likely compromise the monopoly position of the union. Despite the egregious use of monopoly power to hamper international trade and stifle productivity, the Administration was wary of intervening, apparently fearful of the upcoming November elections and the political costs of moving against organized labor. My guess is that the Administration would do better to look at Ronald Reagan's actions in the early 1980s against a similarly intransigent union, the air-traffic controllers. It turned out to be widely popular and was probably Reagan's finest hour.

Another problem with the Bush Administration's economic policy is that it isn't using antitrust laws properly. They aren't working for either labor or capital. With labor, they function to promote monopoly. If the U.S. had sensible antitrust laws, the actions of the ILWU would violate them. The original Sherman Anti-Trust Act of 1890 forbade any action that was a "conspiracy in restraint of trade or commerce among the several States or with foreign nations." In fact, the Sherman Act was used extensively against labor unions in the 1890s. But later legislation (notably the Clayton Act of 1914 and the Wagner Act of 1935) effectively exempted labor unions from antitrust laws. It would be nice to see the Administration propose a new law to treat business and labor in a balanced way. After all, monopoly over labor in a sector can have adverse economic effects.

So can overcapacity. When it comes to capital, the applications of the antitrust laws seem to prevent consolidation when it is most needed. In the telecom sector, the Justice Dept. (along with the European Union) thwarted the merger in 2000 of MCI and Sprint Corp. (FON ) Now, it is hard to find an industry with more overcapacity and where consolidation would make more economic sense. Similarly, the U.S. government has prevented mergers of airlines, such as United Air Lines Inc. and US Airways Inc., despite overcapacity. More recently, the government impeded a merger of two satellite-television companies--EchoStar Communications Corp. (DISH ) and DirecTV (GMH )--although such a merger would likely enhance competition in the broader market for television signals. If we cannot get a better system, we might be better off repealing all antitrust laws.

Robert J. Barro is a professor of economics at Harvard University and a senior fellow of the Hoover Institution (rjbweek@harvard.edu).

    Before it's here, it's on the Bloomberg Terminal.