Uh-oh.
Washington wants a stimulus package to rejuvenate the slowing U.S.
economy. Usually such programs are full of nice-sounding but wasteful
spending initiatives, as well as tax breaks that have a weak, one-shot
impact on the economy. President Bush should therefore offer a deal:
strong, pro-growth measures as the price for signing off on the usual
unproductive stuff. But the White House has panicked and will go for
things that won't solve the problems plaguing us. The President
should recover his nerve and verve. Otherwise, he will blast away a
positive economic legacy.
The most potent, constructive medicine would be for the Bush
Administration to stop its Jimmy Carter-like weakening of the dollar. A
feeble dollar means inflation--witness what's happened to commodity
prices over the last four years, the most prominent being oil, which
has almost quadrupled in price. This ain't a case of supply and demand.
Four years ago an ounce of gold would buy you roughly 12 barrels of
oil; an ounce today would get you roughly 10 barrels--that's hardly a
300% real price increase. A weak dollar also brings about
economic distortions, such as the (now disastrous) subprime mortgage
orgy. President Bush should announce that we will defend the dollar and
make it stronger. The Fed should announce that it will let the federal
funds interest rate float, at the same time removing some of the excess
money it created in 2004--05.
The bottom line: No strong economy has a weak currency.
An additional and powerful shot in the arm would be to make
permanent--and, indeed, deepen--the tax cuts on dividends and interest
that expire in 2010. Reduce the levy on dividends and capital gains
from 15% to 10% and you'd see a sharp boost in equity markets, as well
as in consumer and business confidence. Business capital outlays would
boom, as would entrepreneurial startups.
Former Bush economic adviser Larry Lindsey recently came up with a good idea in the Wall Street Journal to
unclog the tightening credit arteries: Allow manufacturers and
retailers to open up their own in-house banks or financial institutions
that could borrow and lend money. These entities could make loans to
customers that now frightened banks are increasingly loath to make.
Unfortunately, approval for this type of entity has been paralyzed by
the fight over Wal-Mart's attempt to open such a bank. Unions and banks opposed it, and the proposal has languished.
Congressional Democrats instinctively oppose things that actually
facilitate progress. They'll howl that all of these proposals are a
giveaway to the rich. So in exchange for the good stuff, give them some
of their pet projects in return; for example, one-time rebates of the
kind George Bush issued in 2001 and Gerald Ford in 1975.
The Democrats will want some other programs, such as temporary aid
to states for housing assistance. These things are well worth the price
for the short- and long-term power of tax-rate reduction, sound
currency and unclogged credit arteries.
Pernicious Pretension
Why is there an almost universal dogma that governments can play
significantly positive roles in economic activity, that they can
fine-tune economic activity and prevent excesses and cushion downturns?
It's a colossal conceit, and one that does immeasurable harm.
Economies are not like engines that can be mechanically manipulated to
run better. To hear all the chatter about tax rebates, for example,
you'd think they were the equivalent of recharging your car's dead
battery.
In fact, it's usually government actions that cause
destructive economic troubles and excesses. The Great Depression, for
instance, is always cited as prima facie proof as to why we need active
government involvement. To the contrary, government blundering brought
on the disaster, starting with the Smoot-Hawley Tariff of 1929--30,
which began a devastating trade war that, in turn, dried up
international trade and flows of global capital. That horrible error
was compounded in the U.S. by Herbert Hoover's massive tax increase to
balance the budget in 1932. Hoover thought a balanced budget would
revive confidence. Instead, the deficit ballooned, as the high taxes
deepened the slump. Compounding Hoover's errors, Franklin Roosevelt
retarded recovery through major tax increases and destructive
regulatory meddling. For the first and only time in our history a
recovery didn't surpass the peak of the previous economic expansion.
The horrific inflation that racked the U.S. and most of the world in
the 1970s and early 1980s was clearly the result of excess money
creation by the Federal Reserve, abetted by other central banks.
President Richard Nixon cut the U.S. dollar from gold in 1971, and
central banks floundered.
Today the weak dollar is roiling financial markets and hurting our economy.
As for the cures for economic contractions, government spending
isn't one of them. Franklin Roosevelt repeatedly "primed the pump" with
government spending and job-creation programs in the 1930s--to little
avail.
Japan repeatedly enacted stimulus packages during its 15-year
quasi-recession, from the late 1980s to the early part of the new
millennium--futilely.
If government spending was the way to wealth, the Soviet Union would have won the Cold War.
What governments can do is create environments in which
entrepreneurial activity can flourish--a sane legal system with
property rights, low taxes, sound money and minimal barriers to doing
business. But rebates and "emergency" spending measures, or the Fed
playing with interest rates to encourage or discourage economic
activity? Bah, humbug.
Reagan Would Applaud
Rudy Giuliani unveiled a tax cut/tax simplification proposal
recently that is the most sweeping and exciting since the days of
Ronald Reagan. The personal income tax rate would be cut sig-
nificantly. The corporate tax rate would be whacked from 35% to 25%,
and the capital gains levy would be reduced by a third to 10%. Capital
gains would also be indexed for inflation--no more paying taxes on
phony gains. There would be tax-free savings vehicles for individuals;
the Alternative Minimum Tax would be indexed for inflation and
ultimately eliminated; and the death tax would be buried once and for
all. An eye-opening feature is Giuliani's one-page income tax form. If
you wished, you could literally fill out your income tax return in less
than 20 minutes.
While not a pure flat tax, this is an enormous step in that direction.
Giuliani recognizes that our tax on business profits is now the
second highest in the developed world and that encouraging risk taking
by reducing the capital gains tax burden will quicken innovation. He
also knows that tax simplification will free an incalculable amount of
brain power for use in more productive pursuits.
Can Giuliani get this done with the Democrats likely to control one
or both houses in Congress? His record as Mayor of New York City offers
real encouragement that he could achieve a significant chunk of it.
Even though Democrats controlled the New York City Council by a 45-to-6
margin, Giuliani was able not only to keep spending below the rate of
inflation and reduce the size of the city bureaucracy but also to cut
taxes 23 different times, including the city's income tax rates by 23%
(which led to income tax receipts going up nearly 50%). As did Ronald
Reagan, Rudy knows how to rally public opinion and to negotiate and
horse-trade with his political adversaries.
really gotta get playin with the big boys, gotta get into the big time dirty products...stop messin around with the small time micro managed conservative petrochemical mindset of the asian world cuz "if you do it right and you fully leverage along the company, the payout sways the right way"...the irony is that the asian conservative thinking will also be what will weather the storm against this huge recent western collapse. however, i don't care. i'm just gonna keep biting off more than i can chew....
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