It's the Economy, Stupid

President George Bush today turns his attention to the US economy, an area that is presenting the White House with slightly more difficulty than Saddam Hussein.

In his first speech on the economy for about two months, Mr Bush will urge Congress to approve his tax cuts as a way to boost economic recovery and create more jobs.

With an eye on next year's re-election campaign, Mr Bush and his advisers know that hopes for a second term depend crucially on the economy, now that war is out of the way. As James Carville, Bill Clinton's cunning campaign adviser once put it, "It's the economy, stupid."

The president must be only too aware that his father won the first Gulf war and then lost the White House to Mr Clinton as unemployment hit 6% in run-up to the 1992 election. As for his father, the economy is Mr Bush's Achilles heel.

Mr Bush may have confounded the doubting Thomases with a swift victory in Iraq, but he has yet to win over the public on the economy. In a Newsweek poll yesterday, 46% of the public said they disapproved of Mr Bush's economic management, while 44% said they approved.

The problem for the White House is that the US economy is still having trouble dragging itself out of recession. The world's largest economy went into recession in 2001, but recovery since last year has been sluggish, as the job market has shown in the starkest terms.

The job market has shown even more weakness now than in the aftermath of the 1990-1991 recession - dubbed the "jobless recovery". Since the beginning of 2002, redundancies have risen, whereas in the 14 months following the recession of the early 1990s, the US economy created 211,000 jobs.

The labour statistics for March and February were particularly grim as the US economy shed 465,000 jobs, with the unemployment rate stuck at 5.8%. Under the Bush administration, the economy is not growing fast enough to absorb people coming into the labour market.

The White House will be hoping that now that Saddam has been swatted aside, consumer and business confidence will rebound, and there are some straws in the wind. US retail sales showed surprising vigour in March, according to official figures, while consumer confidence rebounded this month, according to the University of Michigan's preliminary consumer sentiment index.

Wall Street, meanwhile, has been rising. Yesterday it jumped 147 points on encouraging earnings results from Citigroup, the financial services giant. Yet few economists share Wall Street's optimism.

"Financials are showing good growth, it's true," a Deutsche Bank briefing note said. "This is as it should be in an economy in which the only growth industry is debt. But in the mainstream non-financial corporate sector, times are tough. We don't buy the optimism on Wall Street."

Companies are struggling to make money and so are reluctant to hire people, even though interest rates are at their lowest for decades. The Federal Reserve has cut rates to 1.25% in a remedy that usually works to stimulate economic activity. But the potion of lower interest rates is taking longer to make itself felt after the 1990s boom reached such excesses.

All too many people thought that the US had reached economic nirvana in the 1990s and that boom and bust had been abolished. Companies, particularly in hi-tech, invested massively on expectations of ever-rising demand. But the bubble burst and companies have found themselves with a surplus of capital equipment, what economists call "excess supply".

There is not much Mr Bush can do (besides blaming Bill Clinton for a lousy economic legacy), except hope that the excesses work themselves out of the system by the time the November election vote rolls round and to avoid policies that make the situation worse.

The last point is important. Just as the first rule for doctors is "do no harm", so the same goes for economic policy-makers. But Mr Bush has violated that rule with his planned tax cut of $726bn (£461bn) although that has been trimmed by the Senate. Pumping up demand in times of slow growth is a classic Keynesian remedy.

But the Bush tax cuts benefit mainly the rich, who probably already spend as much as they like already. Meanwhile the tax cuts will increase already huge budget deficits, which is why economists would have preferred a short-term stimulus plan to one that implies vast amounts of red ink for years to come. The tax plan is the worst of both worlds for Mr Bush - not much stimulus, yet bigger deficits.