Don`t Forget the Economy


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.

Paul
Craig Roberts is the author (with Lawrence M. Stratton)
of The
New Color
Line : How Quotas and Privilege Destroy Democracy

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