Mort Zuckerman
America's next critical test
http://www.NewsAndOpinion.com | The White House is nervous about the economy, and with good cause. The statistics are enough to make an incumbent assume the fetal position: 2.7 million fewer private-sector jobs than two years ago; the longest decline (32 months) in industrial employment since the Great Depression; the longest continuous decline in jobs in more than 50 years; a near doubling of long-term unemployment. Making matters worse, the stock market has been off by double digits for three years in a row. That's the first time that's happened since the 1930s. The markets' plunge wiped out over $5 trillion in value, including the retirement savings of millions of Americans. As if all that weren't enough, the $5.6 trillion federal surplus we saw during the 1990s has been turned upside down into an estimated $4 trillion deficit. Business activity is as weak as it has ever been outside of a recession, and we don't know whether this signals the onset of another recession, the dreaded double dip.
All the bad news isn't due to the Iraq war, 9/11, or a Federal Reserve anti-inflation squeeze, because there has been no inflation to squeeze. Our predicament was triggered by a bust in the most dynamic sector, namely, investment. Capital spending grew by 10 percent in the last five years of the booming 1990s, only to decline by 5.5 percent a year in this decade. This single fact accounted for the entire decline in gross domestic product during the nine-month recession in 2001.
Vicious circle. The investment bubble burst because superhigh stock prices in the 1990s produced a capital-spending binge. That begat an increase in capacity, which begat more competition. That lowered profits, which led to lower stock prices, bringing us full circle to the capital-spending bust. Now about 27 percent of our industrial capacity is idle. That's the highest percentage in 20 years, forcing the corporate sector to cut costs and let people go. Cash flows and profits are improving, but no increase in investment is in sight because demand is just too slack. Just because companies can afford to invest doesn't mean they will.
The veil of economic uncertainty was supposed to lift with the end of the Iraq war, but it hasn't encouraged executives to boost capital spending and hiring. We lost almost 500,000 jobs in February and March alone. Half came from industries like travel, vulnerable to prewar jitters and terrorism fears. But the other half came from industries wrestling with problems that have nothing to do with the war. The jobless claims are ominous. Last week they spiked above 450,000; over four weeks the number is 430,000, the highest levels in more than a year. These numbers don't include over 900,000 people who have left the job market in the past year and 500,000 more who now describe themselves as self-employed.
If investment doesn't recover and exports continue to tumble, economic growth can come only from the consumer and the government. The March spending numbers show a blip because Americans are still keenly interested in buying homes, and mortgage refinancing continues to surge, yielding surplus cash for new appliances, home repairs, and cars. Confidence was higher in April, after the end of uncertainty about the war. But whatever the euphoria about our triumph in Iraq, we all know there's a limit to how much consumers will spend when they're unsure about their jobs and their paychecks are still under threat. The growth in real disposable income is down about 50 percent. Consumers generally are saving more and spending less, having increased their savings rate to 4 percent of income. And with stock prices growing modestly, consumers, particularly baby boomers approaching retirement, are even more likely to increase their savings and decrease spending.
This is a very dangerous moment. It is the moment for action to sustain demand--but we have Republicans and Democrats at loggerheads. The president is investing his considerable powers of leadership and advocacy in tax cuts of about $725 billion, the core of which is dividend tax relief, plus the acceleration of his previous tax cuts approved two years ago. These measures will not do the trick. Neither the acceleration of the phased income taxes nor the dividend tax relief will do enough for anyone in the time we need it--now, or rather, yesterday.
The administration, unsurprisingly, is fighting for its program. They latest Fox News polls found that nearly two thirds of those surveyed said that a candidate's position on the economy and taxes was a more important consideration in deciding whom to vote for, while just 10 percent said a candidate's position on the war would be more important.
That should give strong impetus to both parties to seek a reconciliation of
their very different approaches to stimulating the economy and taking a risk
with the long-term budget deficit. This is not a time for the testing of wills. It is
a time for working out a bipartisan program because time, now, is everyone's
enemy.
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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.
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