Off the Wall
Government Spending, War Weighs Heavily On Economic Outlook
Two decades ago, a conservative vanguard led by President Reagan advanced the “trickle down” economic theory as the needed boost to a flagging economy. Heavily criticized by less conservative groups, the theory proposed to stimulate economic spending by providing a tax break tilted in favor of the wealthiest and most heavily taxed taxpayers.
The idea held that benefactors of the tax cut would spread the wealth and increase economic activity through increased discretionary spending, the benefits of which would trickle down to bring fortune to people of every financial standing.
Government endeavorsIn practice, the premise failed to live up to its billing, although it remained a highly popular idea among the most well heeled. But it also helped cement the idea that the federal government can—and should—attempt to directly influence economic activity beyond merely setting economic policy. As the nation’s single largest consumer, the government yields an enormous amount of economic muscle. Flexing that muscle every now and then was no longer the government’s prerogative, it was an obligation.
In the three administrations since Reagan, there were a number of subsequent attempts by the federal government to nudge the economy in a positive direction, including the most recent 2000 tax cut aimed at putting the breaks on the economic contraction that ultimately sapped the longest sustained period of economic expansion on record.
With the GOP capturing the Senate majority last November, and adding to its margin in the House, business interests will be looking to Washington this year to take a more active role in stimulating the faltering economy. Between big-ticket spending and tax cuts, the government will do its part. Ultimately, restarting the nation’s sputtering economy will have more to do with how well Washington handles international policy, as opposed to its domestic fiduciary responsibilities.
Among the first items of business for the 108th Congress, lawmakers will have to finalize the 2003 federal budget, dealing with 11 appropriate bills that were left over from the previous session. While Congress not only approved the single largest military budget ever, and also approved $60 billion in spending to create a Homeland Security Department, expect the new Congress to embody more spendthrift ways, at least by Washington standards.
First and foremost, President Bush still holds the leash when it comes to setting policy, and Bush is adamant that Washington will be able meet the nation’s security and military needs without raising taxes. Moreover, the president wants to build on the tax cuts of 2000, although don’t be surprised if that enthusiasm diminishes should the United States go to war with Iraq.
Middle of the roadGiven the pressures from the White House, Congress will most likely try to find the middle ground between practicing fiscal responsibility and satisfying constituent interests. Two trends are also almost certain: diminished spending on the environment and increased funding for energy-related projects.
Of course, it will be tough to outdo the $56 billion budgeted to the development of the Yucca Mountain nuclear waste storage facility in southern Nevada. With more than $8 billion already spent on the project, the Department of Energy is only a handful of court rulings in its favor away from green-lighting the project, which would be a positive step forward for the beleaguered nuclear power industry.
While the spending on Yucca Mountain will have mostly a regional impact, passage of the billion-dollar Homeland Security legislation represents a nationwide injection of capital, over a much shorter span of time. For most of the past year, government contractors had been queuing in line to get a crack at the $60 billion in spending connected with the department’s creation. Although technology companies stand to benefit the most from the new agency, included in the appropriation measure were guarantees for terrorism insurance that advocates say will free up more than $15 billion in construction spending that’s been sidelined by the threat of future terrorist acts.
This federal reassurance comes at a particularly acute time. Economic forecasters, while stopping short of crying, “the sky is falling,” are signaling slightly reduced construction spending, primarily from the housing and heavy construction sectors. A lackluster retail Christmas season also does not bode well for commercial construction, which is already strained by high occupancy rates. One of the few bright spots in construction outlooks is hospital spending, which experienced a 17-percent surge in 2002.
Fortunately, the November elections won not only a newly conservative Congress, but a number of state and local bond issues representing billions in spending. Education and transportation measures were the big winners for the day, winning approval for more than $40 billion in new spending, including a $13 billion California school modernization package, and a $6.7 billion light rail expansion in south Florida.
While overall construction is still projected to be down by 1 percent in 2003, the accuracy of these projections are entirely dependent on whether the United States can make progress on two international fronts.
The primary concern for most is whether the U.S. will go to war with Iraq and how quickly we can get out of it if we do. The other is the indefinite, unpredictable threat of another terrorist strike. While it is hoped the former can be avoided, we may never again be quite at ease with the latter.
The quicker we can bring resolution to international stresses, the quicker we are likely to see improvement in the economic picture. If conflict can be avoided, there’s every reason to expect the economy to start firing on all cylinders soon again. And it couldn’t hurt if Congress does find a way to carve out another tax break or two.