Bear Left!

Bush Administration Lacks Credibility on the Economy
Paul Corrigan

8 July 2001

Is the Bush administration schizophrenic about the economy or does it just plain fib?

On June 27, 2001, I was in a hotel lobby in East Lansing, Michigan, when I picked up a copy of USA Today and read a very telling statistic on the American economy. In May, corporate insiders sold dramatically more stock than they bought. For every dollar insiders spent buying, they sold $34.11, more than double the figure for April, and nearly triple the average ratio. Stock options distort the buy/sell ratio so it is important to look at the relative numbers. Simply stated, the statistics indicate that by a margin of 3 to 1 key executives expect their company's stock performance will deteriorate in the future.

Two days after the publication of the statistics on insider trading, Treasury Secretary Paul O'Neill spoke to reassure the markets. O'Neill admitted that U.S. government revenues were lower than expected, but stated the economy was "doing just fine." O'Neill went on to state that the administration was seeing a "huge flow of funds" and noted that a $150 billion surplus was expected for Social Security.

Given that the U.S. economy is growing at an annual rate of just over one percent--the worst performance in a decade--O'Neill's comments contradicted common sense. Senate Budget Committee Chairman Kent Conrad publicly contradicted him. According to Conrad, the Congressional Budget Office was looking at cutting back projections for the 10-year federal surplus by more than $200 billion because of the economic slowdown. Conrad pointed to the economic slowdown, the $1.35 trillion tax cut, and new spending initiatives for defense and education, and raised the specter that the government would have to raid Medicare reserves to balance the budget.

On July 5, 2001, O'Neill spoke again. This time he changed from talking in the present tense to talking in the future tense. He predicted that the $40 billion tax rebate, along with improvements in some key sectors of the economy, would result in a growth rate in the economy of 3.5 to 4 percent later this year with continued strong growth in 2002.

I can't keep the Bush administration stories straight. During the campaign, candidate Bush told voters America needed a tax cut because the taxpayers were owed a refund. President-elect Bush told Americans that they needed a tax cut (not a rebate) because a weakening economy required a stimulus. President Bush told Americans they needed a tax cut to pay for increasing energy costs. Bush's Treasury Secretary, the man who would eliminate corporate taxes, is telling us one week that everything is fine and the next week he is telling us everything will be fine, pointing to the tax rebate as the key driver that will turn the economy around.

However, congressional Democrats pushed for the 2001 tax rebate, not the Bush administration. Eight years ago Republicans excoriated Clinton for recommending that the federal government increase spending in the short term to create a stimulus. If Bush wanted to create a stimulus, why didn't he put the rebate into the hands of working class Americans who would be most likely to spend the rebate quickly for goods and services? The Ford administration rebates in 1975 were aimed primarily at working class Americans. The Bush tax cut was always designed to redistribute wealth in America from the middle class to the wealthiest Americans and to force future cuts in federal spending. Everything else is window dressing.

Unlike E.F. Hutton, and Robert Rubin, when Paul O'Neill talks, people don't listen. Immediately after O'Neill spoke, U.S. stocks fell. The NASDAQ Composite Index decreased 3.7 percent. The Dow Jones Industrial Average declined 2.2 percent. These decreases followed significant downturns earlier in the week and followed earnings announcements by EMC Corporation and Advanced Micro Devices that were significantly below analyst forecasts. EMC pointed to the "slowing economy" for its poor performance. The NASDAQ lost 7.2 percent for the week, a huge loss in market value. Bloomberg reported that the U.S. unemployment rate rose in June and payrolls declined as "businesses fired workers to preserve profits in a slowing economy."

If O'Neill is telling the truth why are corporate insiders selling their companies' stock and why is the direction of the stock market going south? The market value of stocks is a prediction of corporate earnings. Clearly, investors and corporate insiders expect corporate earnings to take a hit in the second half of 2001. What will this do to government revenues? If you want a straight answer, don't ask the Bush administration.