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© 2002 Copley News Service, 11/8/2002
Something is seriously out of kilter when The New York Times can report, as it did on Sunday: "Stocks thrive on downbeat economic news." Bad news is good, and the worse things get, the more optimistic investors seem to become.
In this goofy scenario, investors, I guess, would have a lot to be "optimistic" about. Economic growth is anemic, the unemployment rate rose to 5.7 percent in October, consumer confidence is at a nine-year low and manufacturing output fell again for the second month in a row. Automobiles continue to sell but at a much slower rate and only because manufacturers continue to offer huge price incentives and zero-percent financing, incurring an average loss of $175 per car. Bankruptcies among major airlines threaten to decimate the industry. And the technology industry is weak – 73 major telecom companies in bankruptcy with 20 more lined up to fail. Some of this perverse optimism, I suppose, comes from the sense that such weak economic data this far into a recovery must surely mark the turning point. However, I fear the bulk of the optimism originates in the Keynesian fallacy that lower interest rates will stimulate a consumer-driven recovery and that signs of economic weakness will impel the Federal Reserve Board to cut interest rates. Both parties have fallen victim to this fallacy; hence, we have a midterm election without either party putting forth a coherent program for economic recovery.
The Democrats can talk of nothing but creating a huge new prescription-drug entitlement, and Republicans offer little beyond terrorism insurance for businesses. Neither party in Congress proposes the kinds of supply-side tax-rate reductions that Presidents John Kennedy and Ronald Reagan promoted to spur capital investment; reward work, saving and risk-taking; and improve the outlook for profits, which is the only way to get this economy moving again. Both parties seem to favor more, not less, regulation. Meanwhile, neither elected officials nor Federal Reserve bureaucrats recognize the reality of monetary policy: Until the Fed stops targeting interest rates and instead begins watching market price signals to provide markets all the liquidity they demand, the central bank can lower interest rates all the way to zero, as the Bank of Japan did, and still not foster a healthy economy.
The world economy is in a precarious situation made worse by the threat of a war few of us want to see happen. In Europe, Germany is illustrative, staggering under the weight of an obese welfare state it can no longer support, with tax rates so counterproductively high that they actually cost the government revenue. German capital investment is anemic, the quality of German credit is deteriorating and with it the financial health of its banks. German bankruptcies are on the rise, and unemployment remains above 9 percent.
Without America's economy on the rise, there is nowhere near sufficient economic lift to overcome the drag of harmful economic policies and keep the world economy airborne. While there is much talk these days about America's responsibility to bring freedom and democracy to the rest of the world, we seem to have forgotten that a strong world economy in which every country can participate is one necessary condition for freedom and democracy to thrive.
With the pressures of the campaign behind them, the president would do the country an enormous service by keeping the lame-duck Congress in session for a while longer to make a run at reducing tax rates on work, saving and investment. With bold presidential leadership, there is at least a fighting chance to, say, raise the limits on how much workers can place in tax-deferred retirement accounts, raise the amount of capital losses hard-hit investors can deduct and deliver some measure of relief from the double taxation of dividends.
The president can do a number of things by executive action to help the economy, as well. To start, he could roll back the tariff increases he imposed on the economy earlier this year. He also could declare all broadband services (DSL and any others) "information services," thus deregulating them and removing the disincentives to invest in telecommunication companies. He could rein in the career antitrust lawyers of the Justice Department and the Federal Trade Commission who are preventing economically rational mergers and efficient pricing.
Even if the lame-duck Congress failed to deliver this year, its very attempt to succeed would lay the predicate for the new Congress to take swift action after it convenes next year. And by taking bold executive action now to help restore growth, the president would demonstrate his resolve to put economic growth at the top of the nation's agenda once again.