Jewish World Review Oct. 8, 2001 / 21 Tishrei, 5762
http://www.jewishworldreview.com -- THE blow that brought down the World Trade Center may have driven a weakening economy into a serious and long-term recession, a nasty hangover from the biggest economic boom in U.S. history. It is not just the immediate costs, which will probably exceed $100 billion nationally, and $50 billion in New York City. It's the shock wave. Americans have stopped traveling, buying, and eating out. The hotel and resort business is collapsing, casting thousands onto the unemployment rolls, and big-ticket purchases seem to be slowing. The crisis of confidence for both business and consumers could last a long time if consumers dig in, the last domino to fall following the precipitous decline of investment and exports. This unique collision of forces could result in what might, for lack of a better term, be thought of as the "perfect economic storm."
President Bush's decision to add up to $75 billion in fiscal stimulus to the $50-plus billion already approved is the right move. But how to spend the money? The facts of economic life must drive the decisions. First, let's recognize the squeeze on businesses to cut capital spending even more than the current decline of about 15 percent an- nually-a drop from the 20 percent growth rate of previous years. It's a natural reaction to the most rapid decline in corporate profitability since the end of World War II-an overall drop of at least 18 percent this year-with fourth-quarter profits now looking to plunge around 25 percent. Even at these lower levels, capital spending has been unusually high relative to corporate cash flow, and even as a percentage of GDP.
Since external funds are constrained, as well as profits, it's easy to see why the inflection point for an upturn has, at the very least, been deferred. Shoring up corporate finances is going to come first, not buying new equipment.
Even without these pressures, the investment boom of the 1990s has left us with major excess capacity. Capacity utilization in the "old economy" is down to 74 percent. In the "new economy," it's under 65 percent. Such numbers make it impossible to imagine that there will be a spending recovery of capital, plant, and equipment anytime soon, no matter how many times Alan Greenspan cuts interest rates, and no
matter what additional tax carrots the government offers. One-time cuts. Who will pull us out? Not Germany, and certainly not Japan. No, it's going to be up to the American consumer. But what are the chances of that? Consumers are already deep in personal debt. New jobs are hard to find for those who have lost their old ones. This is where the administration's stimulus program should be targeted. There are three avenues. First, tax cuts should be one-off programs to put money in the pocket of middle-class and working-class Americans, who are the most likely to spend it. Remember that this year's tax rebate of $38 billion had little effect on the consumer.
In one survey, only 18 percent said they would spend their rebate. So the better solution is to cut withholding tax rates. Consumers spend in amounts ranging from 60 percent to 90 percent of their earned income within a relatively short period of time. Second, extend unemployment compensation. This money would clearly be spent almost right away. And third, help those states and cities that have suffered revenue shortfalls as a direct result of September 11.
The overall economic package-including what has already been approved for defense, reconstruction, and the airline bailout-will probably total between $100 billion and $150 billion, adding at most 11/2 percent to GDP growth in a $10 trillion economy. But we must beware of the crosscurrent. Increased spending by the government means smaller surpluses-indeed, the surplus has disappeared before our very eyes-higher interest rates, and less private investment. Long-term rates are sensitive to the increased uncertainty about the durability of future fiscal surpluses at the federal level. That's why it is so important that tax relief or funding programs should be one-offs. That way they can be shut off before they threaten future surpluses-and before they panic financial markets with the fear of a structural, or continuing, budget deficit, like the one we endured in the 1980s and 1990s.
For this reason, Congress should also suspend the tax cuts scheduled for the years 2005 to 2010. We need to make this money available as a backup now, especially if the first kick start only turns the engine. The financial markets would applaud the reduced risk of a continuing federal deficit. And that, in turn, would increase our chances to lower interest and mortgage rates in the near term to accelerate capital spending.
Here is a combination that offers the best opportunity to shore up
business and consumer confidence. It is equitable and efficient. It would
enjoy the support of the American public, who, understandably, refuse to
accept that they should pay more in economic misery than they have
already paid in the blood of the innocents