Jewish World Review Nov. 21, 2002 / 16 Kislev, 5763
http://www.NewsAndOpinion.com | Not for nothing is economics called the dismal science. These days, economists are feeling not just dismal but downcast, depressed, and dejected. At the start of 2001, most believed we wouldn't have a recession; we were already in one. Most predicted, both in 2001 and again in 2002, that gross domestic product would grow between 3 percent and 4 percent each year. Even without 9/11 those predictions would have been off the mark. Way off. Our economic policymakers similarly reckoned that corporate investment would have revived by now, thanks to the dramatic cuts in interest rates and a fiscally stimulative tax cut. Wrong again. Oops. Capacity utilization in the manufacturing sector today is only 74.4 percent, close to the low of 73 percent last Decemberthe worst at this stage of recovery since the Great Depression.
The real problem is that we are in a different kind of recession. Clamping down on inflation, by tight money, took us into all the postwar recessions. Not this time. Inflation was virtually nonexistent. It was an investment bust, not the Fed, that accounted entirely for the fall in GDP in the first three quarters of last year. The Fed, in fact, began cutting rates before it was clear we were in a recession. And it hasn't worked to revive investment. Businesses have been trapped by the "too much" syndrome: too much capacity, too much debt, too much competition. The extraordinary growth in productivity, fruit of the 1990s investment boom, allowed firms to cut workers, but even so, profits have suffered their sharpest decline in decades.
No more Mr. Micawber. What now? Surveys from the National Association of Manufacturers and the National Federation of Independent Business indicate that CEOs intend to keep holding back on capital spending while they look for still more cost cuts. Does this mean that the people who write about the economy are more optimistic than the folks who write checks?
Well, on the bright side, the economy has done remarkably well in the face of terrorism, a synchronized global slowdown, endless accounting scandals, and climbing oil prices. The optimists rely on the fact that tech spending and capital expenditures, other than aircraft and energy, continue to grow, the unemployment rate remains low, and household incomes are up, with total compensation increasing by over 4 percent.
The real bright spot, of course, is the massive mortgage refinancing and the support to increased home values and new housing provided by record-low interest rates. This year's "cash-out" refinancing is estimated to provide the consumer with over $200 billion in tax-free money, a big boost to spending since about two thirds tends to be spent and the rest goes to pay down nonmortgage debt.
Pessimists can point to other evidence: higher initial claims for unemployment insurance; consumer confidence plunging to the lowest level since 1994; the stock market in its third straight year of declinessomething we haven't seen since 1939 to 1941. For those with strong stomachs, there's more: leading indicators down four months in a row, auto sales slumping from their summer highs. Consumers are retrenching and focusing on replenishing their net worth.
Much will depend on Christmas sales, but on balance, we seem to face a protracted period of slow growth at best or a further slump in output at worst, with the evil demon of deflation waiting in the wings.
It is time, plainly, for the White House and Congress to come up with a plan. The downside risks are too severe to go on hoping, like Mr. Micawber, that something will turn up. Here are five steps that might be useful:
1. Take the present worth of the future tax-cut program approved earlier and schedule the cuts over the next two years, when we'll need them most. It simply makes no sense, as is now the plan, to stretch these cuts out over the rest of the decade. Fed Chairman Alan Greenspan has supported President Bush's wish to make the future tax cuts permanent, because they are already factored into investment and corporate planning. But the real need is now.
2. Accelerate depreciation to stimulate investment.
3. Extend unemployment compensation for those out of work for long periods of time.
4. Help the states. Revenues in state coffers have plummeted across the country, forcing governors to slash spending and lay off workers.
5. Change the team. The confidence of the business community and the consumer has been anything but buoyed by the performance of the Bush team's economic leadership. New blood, and brains, are required.
Desperate times, as the wise man once said, require desperate measures. Act quickly on all five fronts, and the dismal science might not be so dismal. Delay, and our economics will remain as gloomy as the conditions of far too many Americans today.
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