Don't Forget the Economy | Articles

Don't Forget the Economy

11/19/2001

A+

PCR 11-19-01 CS economy

Economic policy has reverted to old pre-supply-side prescriptions and is failing. Tax rebates on past earnings and past investments do not improve earnings on new investments or lower the cost of labor. Government pork barrel spending is not a stimulus; it simply crowds out an equivalent amount of private spending and prevents resources from being used more productively.

Phased in tax rate reductions delay economic activity until the future when the tax reductions become effective. Temporary tax cuts are like rebates and have no positive effect on future activity.

Supply-side economists taught these lessons two decades ago, and the lessons are already forgotten. There is little if any sign of these lessons in the tax cut passed earlier this year and even less sign in the current bickering over an additional "stimulus" package.

At the present time, the main economic problem is over-investment in certain sectors, primarily telecommunications and technology. The over-investment was in part bubble and in part caused by federal regulatory and legislative mistakes that prevented the completion of the broad band spectrum.

Many business plans and new startups were keyed to the completion of broad band spectrum. These plans and businesses failed when the federal government foolishly prevented the completion of the new communications spectrum.

Profits were not realized on investments, and down went share prices. The slide in the stock market reduced household wealth. Like business debt burdens, consumer debt burdens became a cause for concern. So far consumer spending has held up better than normal in a downturn, partly due to inventory clearance bargains, such as no interest loans on cars, and mortgage refinancings that increase household disposable income.

Many prices are falling, but this is normal when there is over capacity and excess inventories. There is no reason for these adjustments to become a general deflation as long as the Federal Reserve buys bonds and puts new money into the economy.

Although understandably preoccupied with the war on terrorism, the Bush administration needs to give some leadership to the economy. This means recognizing its own mistakes.

New administrations desperately need to begin with legislative successes. This was especially true for Bush, because Democrats strongly contested his election and tried to brand him an illegitimate president.

Consequently, Bush settled for a tax cut that isn't really a tax cut, at least not when we need it. The feebleness of the tax cut is generally understood and has led to a second bill to rescue the economy with added stimulus. But having dropped the ball on the first bill, the second bill is worse.

Pork barrel spending will not prevent companies from laying off workers in order to improve reported profits and cash flow. So far the economy has been spared massive layoffs. To keep layoffs at bay, President Bush must take the lead with supply-side incentives.

Without earnings, companies do not hire and invest. To be successful, economic policy must improve the prospects for earnings. With taxes as high as they are, the easiest and quickest way to improve earnings is to cut tax rates at the margin where decisions are made.

The solution to the economy's problems is obvious and simple:
Effective immediately, abolish the alternative minimum tax, accelerate depreciation on a permanent basis, and cut tax rates on personal income.

Do not worry about how to pay for these measures. Instead, worry about paying the economic and political costs of a recession that could deepen substantially.

Now is not the time for politicians to lard up their districts with pork or for Democrats to harm the economy in order to weaken Bush. According to liberals, politicians act in the public interest. Let's see some of that in action.

Bad economic policy can run up government debt without having any positive impact on the economy. Just look at Japan, which has wrecked its economy with mindless economic policy.

It will be disastrous if economic policy falls between the cracks while the administration is preoccupied with terrorists.