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Jewish World Review Feb. 14, 2003 / 12 Adar I, 5763

Mort Zuckerman

Mort Zuckerman
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Consumer Reports

Needed: fast fiscal action | America is suffused with a sense of unease, uncertainty, and anxiety. It is confirmed in the polls. Substantially less than half the country now thinks we are heading in the right direction. The wellsprings of this public mood are twofold and connected. One is the anemic economy. Despite two years of highly stimulative monetary and fiscal policy, low inflation, and even a return to modest growth, we still do not have a sustainable recovery. The other concern is the political tension arising from the fear of terrorism and the likelihood of war after Secretary of State Colin Powell's devastating indictment of Iraq. Everyone is holding his or her breath--which in business terms means holding back on hiring and capital spending.

Most Americans gauge our well-being from watching that television soap opera, the daily stock market reports. They have waited and waited for the good news, and it has not come. For the past three years stocks have suffered annual double-digit declines, and many Americans instinctively think that if the stock market goes down, so, too, must the economy. The result is a growing pessimism.

The source of the malaise, and the puzzlement with it, is that this recession has not followed the post-WWII pattern. Until now, recessions have worked this way: Pressure on resources triggers rising prices, followed by monetary tightening by the Federal Reserve, a squeeze on interest-sensitive consumption in housing, autos, and durables, and finally rising unemployment until inflation is suppressed. Not this time. Inflation has been no problem, and the Fed began to lower interest rates even before it was clear we were in a recession in 2001. As a result, for the first time ever there has been no real consumer contraction during a recession.

Capital pain. Instead, the economic pain has been focused on the stock market and the corporate side. The $88 billion downturn in capital spending accounts for the entire GDP decline in the nine-month recession of 2001. The investment boom of the 1990s left the country with excess capacity and declining profitability, so firms slashed capital spending, inventories, and hiring, devoting their cash flow to repaying debt and focusing on cutting costs. Even record-low interest rates have barely stimulated capital spending, which finally eked out modest growth in the fourth quarter for the first time in over two years.

Businesses, lacking an increase in top-line revenue growth, just do not feel confident enough to invest and hire, so, despite the welcome drop in January unemployment reported last week, we still have a near-jobless recovery. Private payrolls dropped by over 200,000 in November and December alone, a critical marker because labor markets ultimately drive consumer spending, which alone produced last year's modest recovery. Fortunately, the principal asset of the American family, a home, has been rising in value, enhancing an equity worth four times the median value of stockholdings. Mortgage refinancing put as much as $250 billion into family budgets.

But refinancing is a nonrecurring event and not a sustainable basis for an economic recovery. Even with it, the recovery slowed dramatically in the fourth quarter of last year to a tepid 0.7 percent, supported primarily by an upsurge in federal spending. The economy is approaching stall speed, and there is scant hope that it will pick up by itself. Demand for cars, houses, and capital goods is petering out; inventory rebuilding is now largely complete; the bulk of past monetary and fiscal stimulus has been absorbed, and productivity growth permits business to expand without taking on more workers.

All of this points to the urgency of the fiscal policy agenda. We need a fiscal spur to public and private spending to stimulate demand now--not years ahead. Tax cuts should be primarily for the benefit of consumers.

This means we have to tolerate larger fiscal deficits in the short run--not just to stimulate the economy but to pay for the military action in Iraq. Alas, the president's plan to eliminate taxes on dividends, which focuses on stockholders rather than workers, suffers from two macroeconomic defects. First, it mostly benefits upper-income groups: About 6 percent of Americans with incomes of more than $100,000 would enjoy two thirds of the benefits, and their spending habits are not likely to be changed by this tax break. Second, dividend tax relief would be a far weaker stimulant to capital spending in the short run than a spike in consumer demand, given that we are still operating at a dismal 74 percent of capacity, compared with the 82 percent average of the past two decades.

The president's plan also suffers from one crucial political defect: In its current form, it can't get through the Congress without prolonged partisan wrangling risking continued economic deterioration in the meantime. Congress and the administration should focus on the stimulus plan and defer the dividend tax cut--and do it now.

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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.


02/03/03: Clear and compelling proof
01/24/03: Midnight for Baghdad
01/14/03: They should have said...
12/24/02: Who finances the fanatics?
12/19/02: Put-up or shut-up time
12/09/02: Sheep, wolves, and reality
11/21/02: Curing the uncommon cold
11/12/02: Everybody has the right to be wrong but the Dems have been abusing the privilege
11/05/02: Force vs. fanaticism
10/30/02: Land of the sinking sun
10/22/02: No more cat and mouse
10/15/02: And pigs will fly
10/07/02: A shameful contagion
09/26/02: Calling a madman's number
09/23/02: Our rainbow underclass
09/13/02: Why America must act
09/04/02: After bubbles, a double dip?
08/20/02: No time for equivocation
08/06/02: No time for politics
07/30/02: Getting off the dime
07/17/02: What scandal cannot dim
06/18/02: Time to crack down: Where is the outrage?
06/05/02: The next new thing
04/30/02: Roller-coaster nation
04/25/02: A critical tipping point
04/15/02: Israel's endgame will impact the free world
03/21/02: In the face of pure evil
03/14/02: A man on a mission
03/07/02: Land of the Sinking Sun
02/12/02: Speaking truth about energy
01/15/02: Putting our house in order
01/12/02: Talking points for 2002
12/24/01: The shape of things to come
12/11/01: Finally, a clarity of vision
12/04/01: Apocalypse now
11/26/01: The Big Apple's core
11/06/01: What it will take to win
10/22/01: Getting the mayor's message
10/08/01: A remedy for repair
10/01/01: A question of priorities
09/26/01: Our mission, our moment
09/11/01: Running the asylum
08/29/01: Hail, brave consumer
06/14/01: Blackouts --- or blackmail?
06/01/01: A time to reap --- and sow
05/25/01: A question of confidence
05/18/01: A question of confidence
05/04/01: Making the grade
04/26/01: The caribou conundrum
04/19/01: Chinese boomerang
03/27/01: The man of the moment
03/20/01: The Fed must be bold
03/15/01: Japan on the brink
03/01/01: Rethinking the next war
02/09/01: The education paradox
01/08/01: How the bottom fell out
01/03/01: Quipping in the new year
12/20/00: A time for healing
11/13/00: The need for legitimacy
10/30/00: Arafat's bloody cynicism
10/18/00: Arafat torches peace
10/03/00: A great step backward
09/08/00: The Perfect Storm
08/29/00: Don't blow the surplus
08/15/00: Voting for grown-ups
08/01/00: Arafat's lack of nerve
07/17/00: Can there be a new peace between old enemies? Or will new enemies regress to an old state of war?
07/11/00: A time to celebrate
06/19/00: A bit of straight talk
06/08/00: Using hate against Israel
05/26/00: Is the Federal Reserve trigger-happy?
04/18/00: Tensions on the 'Net
04/13/00: A paranoid power
03/10/00: Fuel prices in the red zone
02/25/00: Web wake-up call
02/18/00: Back to the future
01/21/00: Whistling while we work
01/11/00: Loose lips, fast quips
12/23/99: The times of our lives
12/14/99: Hey, big spender
11/18/99: Fountain of Youth
11/04/99: An impossible partner
10/14/99: A nation divided
10/05/99: India at center stage
09/21/99: Along with good cops, we need a better probation system
09/08/99: Though plundered and confused, Russia can solve its problems
08/31/99: The military should spend more on forces and less on facilities
08/05/99: Squandering the surplus
07/06/99: More than ever, America's unique promise is a reality
06/24/99: The time has come to hit the brakes on affirmative action
06/15/99: America should take pride in honoring its responsibilities
06/02/99: The Middle Kingdom shows its antagonistic side
05/11/99: Technology's transforming power is giving a lift to everything
05/04/99: The big game gets bigger
04/30/99: On Kosovo, Russia talked loudly and carried a small stick
04/21/99: No time to go wobbly
04/13/99: The Evil of two lessers

© 2001, Mortimer Zuckerman