Bush learns the lesson: It's the economy, stupid

Ten years ago, this President George Bush learnt one bitter and abiding lesson from the collapse of his father's presidency after victory in the Gulf War. Never, ever, give the impression you are indifferent to the economy.

George HW Bush gave that impression and when he belatedly professed his concern, no one believed him. The son will not repeat the error. The ousting last Friday of Paul O'Neill, the gaffe-prone Treasury Secretary whose greatest sin was honesty, and of the chief White House economic adviser, Larry Lindsey, is a case, to borrow Bush senior's unavailing 1992 catchphrase, of "Message: I care."

In their replacements, John Snow and probably Stephen Friedman, Mr Bush has the team he thought he had picked in Messrs O'Neill and Lindsey, when he took office in January 2001: a widely admired CEO with a proven track record at Treasury, and a smooth operator as his chief White House economic adviser, who would work well with Wall Street and co-ordinate the various Cabinet departments involved in economic policy making.

The first time around, it just didn't work like that. Mr O'Neill never grasped the difference between running a corporation and being the chief economic spokesman, both at home and abroad, of a political master. He might have had the temerity to tell the truth, but in government, diplomacy and tact are also part of the mix.

Equally damaging, true Republican believers always doubted his support for tax cuts. One way and another on Wall Street, on Capitol Hill and in the many foreign capitals which had felt the lash of his tongue, Mr O'Neill's stock could hardly have been lower.

Now Mr Lindsey, an architect of the President's $1.3 trillion (£823bn) tax cuts policy, could never be accused of being a closet fan of big government. But as a consensus builder and policy presenter he never measured up – not least because he was often at odds with Mr O'Neill. In short, Mr Lindsey was simply not the person to send out on the Sunday TV shows to talk the talk for Mr Bush.

These shortcomings might have been forgiven if the economy was again growing robustly, and looked as if it would continue on track until Mr Bush was safely re-elected. But on the day Mr O'Neill and Mr Lindsey walked the plank, the Labor Department announced a jump in the unemployment rate to 6 per cent, its highest level in almost nine years.

The President declared yesterday, as he introduced Mr Snow: "Investor confidence needs to be strengthened, many Americans worry about losing their jobs." The unspoken worry of this particular American was for his own job in 2004.

But can the new team make a difference? Like Mr O'Neill (and Dick Cheney and Donald Rumsfeld), Mr Snow, 63, is a veteran of the Ford administration of a quarter of a century ago. Like his predecessor, he is a successful CEO (Mr Snow at CSX, one of the largest US rail companies, Mr O'Neill at the aluminium giant Alcoa).

He is a fine articulator of policy, and is well known in Washington. He also has the "Main Street" credentials that Mr Bush calculates will reassure ordinary Americans. Whether he can become another Robert Rubin, who under Bill Clinton was one of most admired and influential Treasury Secretaries in US history, is another matter.

But if you can't get the original, you can go for the next best thing – in this case Mr Friedman, Mr Rubin's co-chairman at Goldman Sachs from 1990 and his successor when the latter went to Washington in 1992.

Mr Friedman is said to be Mr Bush's all-but-certain pick to succeed Mr Lindsey. His strengths are impeccable Wall Street connections and a knack for getting the best ideas out of subordinates and pulling them together into a coherent policy.

But the most skilful economic messengers will count for nothing if the message itself turns sour. The economic omens right now are hard to read. Growth this year will come out at about 2.5 per cent (although fourth-quarter growth may not top 1.5 per cent, compared with a revised 4 per cent in the third quarter). Iraq and oil shocks permitting, 2003 is expected to produce more of the same.

But the very factors that made the 2001 recession so shallow – the continuing surge in productivity, the resilience of consumer spending and the strength of house prices – may sap the strength of the recovery. Having slowed less than expected, some traditional motors of growth may be less potent now. Those hardy US consumers too are more indebted than ever.

Thus the spectre of the double-dip recession has not vanished. The cost of a short Gulf War II might not top $100bn, just 1 per cent of US GDP; a long one, however, that sent oil prices soaring and Wall Street plunging, and all bets are off.

Little noticed moreover are the dire financial straits of individual US states, many of them facing their worst budget crises since the Second World War. The new Treasury Secretary can push more federal tax cuts and insist all will soon be well. But any fillip to the economy might be shortlived if states trim jobs, cut spending and raise taxes, to meet their constitutional obligations to balance their books.

But tax cuts there will be. The White House will almost certainly unveil a new stimulus package of $300bn in the next few weeks, a mix of cuts in capital gains tax for investors or corporations to cheer up Wall Street, and the acceleration to next year of income tax cuts for middle and higher earners now scheduled for 2004.

But the politics are not as simple as they seem. There will also be something for lower earners to meet the certain Democratic complaints that yet again the Republicans are being nice to their rich business friends.

However ably Mr Snow and Mr Friedman perform, the realities of life on Capitol Hill mean Mr Bush will need Democratic help to get his package through. But as his party controls both houses of Congress as well as the White House, the President will have a hard job blaming the Democrats if his therapy fails.

And if it does, the ghosts of 1992 will cluster round the campaign of 2004. "It's the economy, stupid," was Bill Clinton's winning mantra then. By juggling his economic team now, George Bush is doing his best to ensure no Democratic challenger tries a re-run in two years' time.