advertisement

Down in the dumps. While the manic-depressive stock market swings in time with the latest news from the front, economic analysts have become progressively more gloomy. Recent reports show jobs and retail sales down and manufacturing returning to its chronic malaise after a temporary boost from Pentagon purchases. More worrisome yet, oil prices, after a week of preinvasion euphoria, headed back up when the cakewalk to Baghdad turned out to be a little bit stickier than expected. The culprit wasn't any actual oil shortage but reluctance on the part of energy companies and refiners to rebuild stocks at high prices when oil prices are expected to plummet as soon as the U.S. victory is secured. Prices have already eased a bit, but perhaps not in time to rescue the energy-sensitive economy from another dip into recession. In the view of Merrill Lynch's Richard Bernstein, "Investors are viewing geopolitics much too narrowly. Despite the consensus that the U.S. economy will be fine after the Iraq war and that the uncertainty will be quickly lifted, our feeling is that we might be entering a 10- or 15-year period of significant changes to geopolitics and that considerable uncertainty will remain."

Up on the Hill. The Senate surprised the White House on March 25 when it voted to cut the president's requested (and House-approved) $726 billion in "growth" tax cuts to a mere $350 billion. These would be part of a much larger set of tax cuts, totaling $1.4 trillion over 10 years in the House budget blueprint and $852 billion in the Senate version.

Bad timing may be to blame for this rare setback in the gop-controlled Congress. Seems that administration budgeteers suddenly realized that the war wasn't going to be costless after all, as the president's January budget implied. (Perhaps they got a hint from the fact that they had already spent many billions deploying troops to the Iraq theater even before the war started.) Also, critics had pointed out that a few other items–increased spending for homeland security, securing and rebuilding Afghanistan (remember that war?), and paying off partners in our "coalition of the willing"–had somehow been left out, too. Heartened by an earlier Senate rejection of an effort to trim the tax package, the administration didn't wait for the final vote before sending up a "supplemental" request for some $74.7 billion to cover these exigencies for the rest of the year. This harsh reminder that these costs weren't even counted in the $2 trillion in budget deficits that their pending resolution would produce over the next decade persuaded a few Republican senators to cast a vote for restraint.

But save your tears. White House strategists may well be laughing all the way to the bank. The administration had originally intended to ask for only $350 billion, a bold enough request in time of war and mounting deficits. Moreover, Hill Republicans are already plotting a strategy that would preserve the larger amount. This would involve offering up broadly popular tax cuts–such as enlarged child tax credits and reduced "marriage penalties"–for separate, later votes. Meanwhile, provisions primarily targeted to the upper-brackets–dividend tax exemption and abolition of the estate tax–would be shielded inside the filibuster-proof budget reconciliation package. Pretty slick.

Over on the supply side. Things, however, were not looking so good for those enthusiasts who maintain that the right kind of tax cuts–those that stimulate the juices of the investing classes–pay for themselves by spurring economic growth. They had hoped that the Congressional Budget Office's new chief, Douglas Holtz-Eakin–fresh from his job as chief economist for the president's Council of Economic Advisers–would finally adopt "dynamic scoring" that would take account of this feedback effect. Well, the new CBO chief did just that, running the president's budget plan through several well-respected growth models to capture any supply side windfalls. The conclusion: "[R]egardless of its direction, the net effect on output through long-term changes to the supply side of the economy... would probably be small." Also noteworthy: The two models that did show significant positive effects assumed that the tax cuts would be limited in duration and ultimately financed with "a lump-sum tax increase." Oh well, a little tweaking of those models should produce a more pleasing answer for the president–in fact, the Treasury Department reportedly is already putting touches on a report that will do just that.

Back in Enron land. They may not have been as flashy as the Ken Lays, Jeff Skillings, and Andrew Fastows, but executives of HealthSouth Corp. would surely have hit the headlines in quieter times. This week, five more lower-level executives joined three top executives in pleading guilty to cooking the books of the giant healthcare provider–heating them up by at least $1.4 billion over several years. The HealthSouth record keepers apparently didn't bother to disguise their shenanigans by setting up "special purpose entities" or swapping derivatives; they just, well, fiddled the numbers. They did this, the Security and Exchange Commission charges, at the direction of the firm's founder and patriarch, one Richard Scrushy, who would first go over the real numbers with his chief financial officer (one of the guilty pleaders). He would then instruct underlings who would gather in "family meetings" to pump up the numbers to meet Wall Street expectations. That kept the firm's stock flying high–much to the advantage of Scrushy, who, according to Thomson Financial, sold nearly a quarter billion dollars' worth of HealthSouth stock over the years. Scrushy has yet to respond to the charges, although he instructed his lawyer to say that he was "shocked" by the government's allegations. Not more gambling in Casablanca!