[jyl]

The President does not influence short-term interest rates. Those are set by the Fed.

Starting in 2001, Greenspan drove short term interest rates to record low levels, until real short-term interest rates were actually negative (i.e. short-term rate - inflation rate < 0). This was a huge economic stimulus. For the past few years, credit has been extremely easy to obtain - it practically doesn't matter what sort of credit record an individual has, or what credit rating a corporation has, whether a subprime borrower or a junk bond issuer, everyone can get plenty of credit at the lowest interest rates since the 1950s. Hence the housing market has boomed (bubbled?), consumers have continued to spend (on credit), and the economy went into a mild recession, instead of a more severe recession.

What the President has influence over is taxation, federal government spending, and thus the budget deficit. In 2000, newly-elected Bush began pushing his tax cut program, on the grounds that the federal budget surplus should be returned to the taxpayer. By 2001, it was clear that there was no longer a federal budget surplus. Bush changed arguments, and started pushing his tax cut as fiscal stimulus to pull the economy out of recession.

Thus federal taxes were significantly cut, on ordinary income, on dividends, on corporate profits, and so on. These tax cuts helped keep the recession short and mild, by propping up consumer spending and boosting corporate cash balances.

Bush also presided over a large increase in federal government spending, via the Iraq war and the war on terrorism (lots of new spending) and also via other federal spending (very little reduction fo existing spending). This also helped keep the recession short and mild, by pumping federal spending into the economy.

So fast-forward to 2005. We have an economy that experienced a mild recession, and now is experiencing a very weak recovery. Job growth is very weak for this stage of an economic expansion, and continues to lag population growth. Wages are weak, with the average hourly wage actually declining. The stock market is struggling (basically just churning) and the bond market is anticipating weak economic growth going forward.

Why such a weak economic recovery? The actions taken by the Fed and the Administration had the short-term benefit of softening the impact of the recession, but they have the long-term cost of putting the country in a bad structural position. The economy has become addicted to record-low interest rates, leaving the Fed in a Catch-22. It can raise short-term rates to normal levels, at the cost of choking off the housing boom/bubble and credit-dependent consumer spending, and potentially sending the economy into another very weak period or a full-blown recession. Or it can leave short-term rates where they are (zero or negative real rates), at the cost of having no ability to cut rates during the next period of economic weakness (rate cuts are like bullets, and right now the Fed's gun is nearly empty). On the fiscal side, the combination of tax cuts and unrestrained spending has created a huge structural budget deficit, leaving the Administration in another Catch-22. It can slash spending and raise taxes, which has major political costs. Or it can let the budget deficit remain huge, growing, and permanent, which hurts economic growth, pressures the US dollar, and eventually causes the interest burden to crowd out other spending.

If you want an analogy, the economy needed to take some yucky medicine back in 2000/01. Choke off credit/deficit spending, rebuild savings, fully deflate the Bubble. Instead, we just papered over the problem. We took only a little bit of medicine, got tons of candy, and replaced one bubble by another. So five years later, this economy isn't bed-ridden but it isn't healthy either. It is limping along with a fever and a cough, and at severe risk of a relapse.