The Economy
September 30, 2002
Mr. BENNETT. Mr. President, we have had a lot of discussion on this floor about the economy recently. Since we are in an election period, we have a lot of discussion on the campaign trail about the economy, with a number of questions being raised--in raised voices--as often happens during a campaign.
One of the questions we have heard thunder forth on this floor is: Who lost the surplus? Where did the Government surplus go? Those who ask the question almost always answer it by saying: It was the Bush tax cut that destroyed the surplus. And it is the Bush tax cut that causes us now to be in deficit.
As I have contemplated responding to this, my mind has gone back to an old Peanuts cartoon. Charlie Brown and Lucy are having a conversation. In the first panel, Lucy is complaining about various problems in her life. In the second panel, Charlie Brown says: Yes, Lucy, life does have its ups and downs. In the third panel, Lucy makes her position very clear. She says: I don't want any downs. I only want ups. And in the fourth panel, she is marching off saying: Nothing but ups, ups, ups. And Charlie Brown responds with the time-honored comment: Good grief.
There are many people who view our economy the same way Lucy does. They do not want ups and downs; they just want ups: a continuum, as far as the eye can see, of years that are better economically than the years before.
There was a period of time, in the 1990s, when we were in the longest sustained expansion of our history, where people were saying: Lucy has finally got her wish. We have nothing but ups.
During that period, I had the opportunity to talk with Alan Greenspan when he appeared before the Banking Committee. I asked him the question--not necessarily in Lucy Van Pelt terms--but I said to him: Have we repealed the business cycle? As we look at the strength of the economy, and all of the years that are ups, have we now reached the point when the business cycle will not kick in and we will not see a downturn?
Well, Mr. President, as you know, Alan Greenspan is one who spoke of the new economy, who spoke of structural changes in the economy as a result of the information age and the application of technology to our decision making. But when I asked him the question with respect to the business cycle, he smiled that wry smile of his and said: No, Senator, we have not repealed the business cycle; it will still manifest itself in the years ahead. And it has.
I brought this chart to the Chamber to demonstrate when the business cycle started to give us a "down." You can see, in the third quarter of 1999, we were still in a strong "up" mode. In the fourth quarter, Christmastime, it was strong. While we did not do so well in the first quarter of 2000, we were still in the very strong "up" territory.
But by the third quarter of 2000, all of a sudden we were down dramatically. We were still not in a recession, because a recession technically is when the economy is shrinking rather than growing, but there was very anemic growth, indeed, of 0.6 percent in that quarter.
You get to the fourth quarter, Christmastime, where before you were up with a growth of 7.1 percent, and now you have a growth of 1.1 percent. It was not a recession technically, but it certainly felt like one.
Before, we had been in strong territory, through the 1990s and on into the first half of 2000, and suddenly we were down in this weak territory in the last half of 2000.
In the first quarter of 2001, we slipped into red territory and negative growth, minus 0.6 percent growth in the first quarter; minus 1.6 percent growth in the second quarter; coming back out of the business cycle, minus 0.4 percent growth in the third quarter; and then, in the fourth quarter of 2001, back into positive territory again.
In the first quarter of 2002, we have strong growth again. Then we are back to 1.3 percent growth. But these cross-hatched areas show what the economists are predicting for the remainder of the year.
So we go from the stronger period of the ups that Lucy Van Pelt loves, then the business cycle comes again, we have a recession, and then we start to come out of it again.
To those who say: Where did the surplus go? and, Wasn't it eaten by the tax cut? I say the answer is very clear: It was eaten by the business cycle.
What causes the business cycle? What causes things that have been going well for so long to suddenly go wrong? There are several reasons. Let me try to discuss each one of them.
The first thing that causes the business cycle is, quite frankly, bad decisions--bad decisions on the part of policymakers in Government, bad decisions on the part of business men and women, bad decisions on the part of managers.
One of the reasons we have seen the severity of the business cycle tamp down a little, so that the swings are not nearly as wide as they used to be in my father's business days or my grandfather's business days, where we do not have anything like the panic of 1873, we do not have anything like the Great Depression of the 1930s anymore, is that business men and women have better access to information and, therefore, they make fewer mistakes.
The classic business cycle in the manufacturing world would run like this--this is oversimplified, but it illustrates the point. You open a factory, and you start to produce widgets. You can see I went to business school because in business school they always talk about widgets as the generic product.
All right. You open a factory. You start to make widgets. Let's say your widgets sell pretty well. As the sales reports come in, you, as the manager of the factory, the manager of that business, say: We need to build more capacity. We need to make more widgets because there is demand for widgets out there.
So you double your shift. You put on two shifts, and you are having twice as many widgets come out of your factory. Pretty soon, people say to you: The wear and tear on our machinery is such that we need to build a new factory to meet this demand for widgets. So you invest in a new factory, and you are back to one shift, but now you are producing something like three times as many widgets as you were before. And you are now in the "up" period because people who make the raw materials that go into widgets are selling them to you, they are paying their employees, they are buying raw materials from their suppliers, and it is all running through the economy. There is prosperity.
While there is prosperity in the economy, there is prosperity in the Government, because all of the employees of all of these companies being hired to help you make more and more widgets are paying taxes on their income. They are paying taxes on the profits they make in selling supplies and other material to the widget maker.
Then one day, someone walks into your office as the head of that widget company and says: Have you noticed how many widgets we have in the storeroom? Have you noticed how big our inventory of widgets has gotten? We have so many extra widgets that we have not shipped that we need to shut the factory down until we work off the excess inventory. We need to shut down at least half of our capacity until all the widgets in the storeroom have been cleared out and sold.
You made a wrong decision to keep manufacturing widgets when the demand started to fall off or level off. You didn't realize it was the wrong decision. It didn't feel like the wrong decision, as you expanded capacity, but now the proof is in the inventory. It is piling up on the back lot, and it is overrunning your storehouses.
You have so many extra widgets, you have to say: Shut the factory down; mothball the extra factory we built because we are not going to be returning to that for quite a while; lay people off until we can get rid of all of the excess widgets we have.
So you go into the downside of the business cycle. You go into a recession. And as you stop manufacturing widgets, you stop ordering raw materials from all your suppliers, and they stop ordering goods and services from the people who supply them. And those people get laid off, and the Government doesn't get any taxes because none of those employees is taking home a paycheck. Indeed, they are now drawing unemployment compensation so the Government is seeing more money go out at the very time less money is coming in, and the Government starts to run deficits. We are in a recession and everybody gets concerned. Gloom and doom overhang the economy.
Then one day the same person who walked into your office and said, do you know how many widgets we have in the storeroom, walks into your office and says: Do you know how bare the storeroom is? We have sold all of those widgets. We have sold all the widgets that were in the back lot. We have sold all the widgets that were in the warehouse. We don't have any widgets. There is still a demand for them out there. You better gear up the factory.
So you get on the phone and you call your workers back and you say: We have to gear up the factory.
Once again, you should have done it earlier, but you made a mistake. You had bad information. In the 1950s, in the 1960s, in the 1970s, you were dependent on hand counts of inventory, sales figures that were sometimes weeks, if not months, after the fact, and it was inevitable that even the best manager would make the wrong decision on the upside and make the wrong decision on the downside, which meant that the business cycle was more and more extreme by virtue of bad information.
The main contribution of the information revolution to the business world has been good information with which a manager can now say: Wait a minute. There is a softening in widget demand. We will eliminate the second shift, but we will continue to operate both factories.
Instead of the wild swings that we used to have in the business cycle, today's swings are narrower and softer, but they are still there because, inevitably, at some point, someone will overestimate sales and thereby build too much capacity and then,
on the other end, underestimate sales and have to turn around, and you will get a business cycle.
In historic terms, this recession, outlined on this chart, is milder than any we have had. Those with memories go back to the recession that started in the early 1990s. That recession was much sharper and more difficult and more painful than this one has been. If you have an even longer memory, go back to the recession of the double dip in the early 1980s when we had economic devastation that would make these kinds of numbers look like paradise.
I remember being taught in school that 6 percent unemployment was full employment, that the economy could not absorb any more than 94 percent of the available workers and when you got to 6 percent unemployment, you were at full employment. In the 1990s, we got down in some parts of the country to 2 and 3 percent unemployment. There were times in my State where employers could not hang on to workers because there were so many jobs. They said: Our biggest problem is trying to get labor.
Interestingly, at the height of the latest recession, at the time of greatest difficulty in the job market, there was wringing of hands, weeping and wailing and gnashing of teeth because we hit 6 percent unemployment. The unemployment rate has started to go down now from 6 percent, after hitting that peak.
So in historic terms, this is a mild recession, but what comfort is that to people who have lost their jobs and, more importantly, to the issue I started out to discuss: How about the surplus and what has happened to the surplus and who lost the surplus?
You can anticipate my answer to that. The surplus was lost to the business cycle. I said there were several things that cause a business cycle. I have given you the one that happens within the business cycle itself.
The other is that outside things come along. The oil shock that hit us in the 1970s helped trigger difficult times. September 11 hit us just as we were struggling with the economic downturn and made it deeper and longer than it would otherwise have been. Outside shocks and outside circumstances can also trigger a business cycle.
So it is not just bad decisions on the part of business leaders; it is also outside problems. We had both of those hit at the same time. The business cycle turned us down, and then September 11 hit us. We have still not recovered from September 11.
I was speaking to a good friend in the hospitality industry. He said: After September 11, we were off 20 percent from the norm. This is an industry that is bigger than the automobile industry in its total impact on the economy.
I spoke to this leader over the weekend and said: Have you recovered yet?
He said: No, we have come back in relative terms. We are now only 10 percent down from the norm.
But in that industry, 10 percent is huge. We have seen airlines that are faced with bankruptcy because people are afraid to fly. They are filling their planes, but they are filling their planes with cut rates that can't possibly give them an adequate rate of return.
What happened to the surplus? What happened to the surplus is that the economy got hit with business cycle problems and with outside shocks simultaneously and, as I was describing in the widget business, when the economy gets hit, the Government gets hit. Tax revenues go down as business activities go down.
As these numbers remain strongly blue and go strongly blue into the future, the tax revenues will come back. They will come back by virtue of the strength of the economy.
The fundamental rule I want everyone to understand is this: Money does not come from the budget.
Money comes from the economy. We can pass any kind of budget we want. We can make any kind of projections we want. But we will be humbled by the realities of the marketplace every single time. Sometimes the marketplace will produce more revenue than we budgeted for. That is what happened in the 1990s. We budgeted, hopefully, to get to a balance by 2002, and the economy surprised us and took us not only to balance, but surplus, in 1999. We were then budgeting surpluses for as long as the eye could see. The economy said: No, you are forgetting the business cycle. That, plus the attack of the terrorists, threw us into this situation, and Government revenues went down, regardless of what we budgeted.
Let us understand, when we talk about what happened to the surplus, that it was not the passage of the tax cut that caused the surplus to disappear, it was not really much of anything we did here on the floor--except as we reacted to the two realities that hit us unexpectedly. The business cycle came along and said I have not been repealed, and the economy slowed down, and then outside shocks hit us in the form of a terrorist attack that devastated large segments of the economy that have still not recovered.
Those of us who are so sure that we control this economy, and what it does by virtue of what we pass here, need to have a little more humility and a little more understanding and realize once again that the most important thing the Government can do in order to maximize Government revenues is to create an economic climate in which market forces can produce the greatest beneficial result. But even at those times, when the atmosphere is most conducive, the business cycle is still with us and will humble us if we keep thinking that, like Lucy Van Pelt, we can go through life with nothing but ups, ups, and ups, and never face the reality of the occasional down.
I appreciate the indulgence of my fellow Senators. I will have more to say on this at another time when we have a sufficient amount of morning business. I recognize the time has come to return to the debate of the bill on the floor.
I yield the floor.