A Bearish Bush Has Economists Worrying

WASHINGTON —  President-elect George W. Bush’s persistently gloomy assessment of the nation’s economic prospects has a variety of economists and policy experts nervous that the nation’s next chief executive is about to make a bad situation worse.

“It matters what he says,” commented Goldman Sachs & Co. economist Edward F. McKelvey. “When national figures keep highlighting problems with the economy, it tends to become a self-fulfilling prophecy.”

“It’s dangerous for people in high places to talk about recession,” added former Federal Reserve Vice Chairwoman Alice Rivlin.

In fairness, the new president and his advisors were worrying aloud about the risks of a slowdown long before the economy appeared to take a turn for the worse in the last couple of months. And Bush’s concerns have put him in good company. The Fed did an about-face last week and declared that the greater danger now facing the economy is no longer too much growth but too little.

“Bush and his people appear to have been very prescient about which way the momentum was going,” said Allan Sinai, chief global economist with Decision Economics Inc., a New York-based forecasting firm. “They’re looking more and more like the Boy Scouts, who have to be prepared.”

Still, there are signs that the Bush team recently has embarked on a carefully choreographed campaign that could not only prepare for an economic downturn but precipitate one. Starting early this month, Vice President-elect Dick Cheney and Bush both used nearly identical language to hammer home the same points about the economy.

“We may well be on the front edge of a recession here,” Cheney said in a Dec. 3 interview on NBC-TV’s “Meet the Press.”

“I think Vice President-elect Cheney was right in echoing my concerns about a possible slowdown,” Bush said shortly after.

The political motives behind the president-elect’s efforts are apparent: to make sure that any problems are blamed on the outgoing Clinton administration rather than on him, and to advertise the need for the 10-year, $1.3-trillion tax cut plan that Bush touted during the campaign.

“The worst thing you can do is send a signal you will walk away from your campaign promises,” Bush spokesman Ari Fleischer said. “President-elect Bush campaigned on tax cuts and he intends to seek them.”

But if the political logic behind Bush’s efforts is impeccable, the economic logic is not, according to analysts. The potential problems could take a variety of forms.

Business desperately hopes that the recent weakness in retail sales is a passing phase and that still-flush consumers soon will get back to the nation’s stores and auto showrooms. Anything that discourages them from doing so could contribute to converting a mild slowdown into an outright recession.

Effects of Remarks Felt at the Fed

“The consumer’s mood is not wholly driven by facts,” said Roger Brinner, chief economist and managing director of the Parthenon Group, a Boston strategic consulting firm. “It’s also driven by the cheerleading of the president and other public figures.”

“I’m not sure they’ll make a big difference,” Richard D. Rippe, chief economist with Prudential Securities in New York, said of Bush’s recent comments about the economy. But, Rippe added, “anything that reduces consumer confidence is not welcome.”

Related is the effect that the president-elect’s bearish remarks are having on the Fed’s efforts to engineer an economic “soft landing” in which growth would continue, but not at what policymakers believe is an unsustainable fast pace.

The central bank already had encountered unexpected setbacks before the president-elect and his aides began highlighting the economy’s weaknesses.

The Middle East blew up and sent energy prices flying. The election produced no clear winner--but plenty of economy-rattling uncertainty--for more than a month. The bond market began to freeze up, making it hard for even rock-solid companies to borrow.

But Bush’s gloomy remarks have not helped matters, according to analysts.

“It’s compounding the Fed’s problem,” said Rivlin, the ex-Fed official who also served for several years as President Clinton’s budget director. “It’s making a steeper downturn more likely. It is also making it more complicated for the central bank to use its power over interest rates to help sustain growth.”

There is considerable debate in Washington political circles about whether the country would be better off using tax cuts or interest rate reductions to protect against, or reverse, an abrupt slowdown.

Tax Cuts Not Seen as a Quick Fix

Even some conservative economists who support tax cuts for other reasons, such as reducing the size of government, agree that they have not proved very effective against economic downturns. And they warned that a lengthy debate concerning a tax cut the size of the one proposed by Bush would keep the Fed from cutting interest rates as much and as quickly as it would otherwise.

“The problem with tax cuts is their timing. They don’t kick in in time to be a solution for economic weakness,” said William A. Niskanen, chairman of the Cato Institute, an economically conservative Washington think tank. “That’s the awkward thing about” the Bush plan.

Finally, and perhaps most important, analysts are concerned about Bush’s drumbeat on the economy because it comes at such a delicate time, just as the economy is slowing more abruptly than almost anyone had expected.

Indeed, many economists, business executives and policymakers admit to being mystified--and even a little frightened--about the speed with which the slowdown appears to be coming on.

They say that such economic fundamentals as employment, household income and corporate profits--while not growing as fast as they once did--still are strong. And the changes in their pace of growth are hardly enough to justify the drastic shift in outlook that has occurred recently.

They say that plunges in stock indexes like the tech-heavy Nasdaq, while costing investors trillions in paper profits, hardly justify the kind of freeze-ups that now threaten the bond and commercial paper markets, corporate America’s lifeblood.

It is onto this uncertain terrain that the president-elect and his aides have ventured. Some analysts warned that they are doing so in ways that could prove much more powerful--and damaging--than they had intended.

“They’re coming into a situation where we don’t quite understand what’s going on, so it’s hard to tell what effect their comments will have,” said McKelvey, the Goldman Sachs economist.

But, he added of Bush’s recent remarks: “They certainly don’t encourage people to regain confidence.”