What do the defenestrations of Paul H. O'Neill, the Treasury secretary, and Lawrence B. Lindsey, the president's top economic adviser, reveal about the economy now, its future and that of the stock market?
About the economy now, the moves show how worried President Bush is that the nation will slip back into recession.
"The economy is perceived to be a serious problem," said Jan Hatzius, senior economist at Goldman, Sachs. "You wouldn't need to change the team if there wasn't a problem."
Nor would you change the team if you weren't worried about being re-elected in 2004.
Clearly, the White House understands that the economy needs strong medicine if it is to stay on its feet and become ambulatory. That medicine, administered heretofore and only somewhat successfully by Alan Greenspan, will soon be augmented by new tax cuts, if Bush has his way.
Neither O'Neill nor Lindsey had the ideas, or the credibility, to fix the problems. So both had to go.
Many economists agree that tax cuts are exactly what the doctor ordered, largely because consumer spending, the engine of economic growth in recent years, is imperiled by excessive borrowing.
"This economy is really laboring under a tremendous debt load," said Paul Kasriel, director of economic research at Northern Trust in Chicago. "The corporate sector has made great strides in slowing down its borrowing, but the private sector hasn't even started."
Sure enough, debt as a percentage of assets among households has reached new highs, consumer borrowing was very strong in the third quarter and equity extraction from homes has been enormous.
The household net worth figures released last week by the Federal Reserve, showing the latest in a string of declines, were also ominous.
"Prior to 2000, there had never been a year-on-year decline in household net worth in the postwar period," Kasriel noted. "It happened in 2000 and 2001 and now 2002. People are going to have to start saving more."
But increased saving means reduced spending, which would in turn drag down the economy. So tax cuts are a way to give consumers the cushion they need to save a bit even as they keep spending.
The problem for Bush is that his tax cuts -- of whatever sort -- are not likely to be enough to counterbalance increased taxes that most consumers will face from their state and local governments, which are struggling mightily. And because spending at state and local levels is almost double that of federal spending, restraint there could damage the economy significantly.
"If you take all levels of government together, it is unlikely that the federal government's stimulus can outweigh the state and local governments' restraint,'' Hatzius said. So even if Bush succeeds in pushing tax cuts through, they may not be that effective in propelling the economy.
As a result, Hatzius and Kasriel both expect the economy to sputter along next year. Hatzius projects gross domestic product growth of around 2 percent for 2003, while Kasriel forecasts around 3 percent. So where does that leave the stock market? Stable, perhaps, but not strapping.
"Sluggish gross domestic product growth usually means corporate profits aren't much better than flat," Hatzius said. And if corporate profits stagnate, stock indexes may, too. What has gone on in the past two years may well continue: individual stocks do well but the indexes disappoint.
"This economy is in hock," Kasriel said. "It has come off 20 years of extreme leveraging. It's going to take time to work through these things. And it won't be pleasant."
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