I Told You So...And It's a Pretty Good Argument for a Sweeping Tax Cut TooCommentary by Pete du Pont
January 05, 2001
There's an old adage that says if you lined up every economist end to end, they still couldn't reach a conclusion. And it certainly looks that way when it comes to President-elect George W. Bush's proposal for a sweeping, across-the-board tax cut. The U.S. economy Bush is inheriting from Clinton and Gore isn't headed for recession, it's into it. Economic indicators point to it. Consumer confidence validates it. And last, but never least, the Fed acknowledges it.
While economists of all stripes were mumbling and stumbling about whether tax cuts were all that wise, the NASDAQ was staggering from the dot-bomb free-fall-down nearly 40 percent during year 2000 and 7 more points January 2. The Dow Jones was limping through economic denial. That's when your commentator declared that the economy was slipping into recession, a recession brought on by the faltering markets and the Clinton Administration's cheerleader attitude toward anti-trust cases against our nation's most successful businesses. Remember Joel Klein and Microsoft?
Maybe a bigger problem, though, was psychology. Both consumers and businesses were acting like the economy was in recession-residential investment, for example, was down more than 12 percentage points, and inventories were being drawn down to very low levels...levels even lower than could be explained by holiday shopping. And holiday shopping was a disappointment to more than one retailer - just ask the folks who used to work for Montgomery Ward's.
There's no doubt that the U.S. economy performed like a thoroughbred during the 90s. Real output increased more than 20 percent. Gross private investment gained more than 60 percent. On the other hand, commodity prices have been declining since 1996, but consumer prices kept going up. So even though unemployment was down, prices were up especially in the areas of health care and retail, both of which have a heavy impact on consumers. And while overall inflation remained low, the psychological impact of these price increases was felt.
In the midst of all this denial about economic recession and talk about how we're really doing fine, the Fed Open Market Committee convened in special session last week and chopped a quarter-point off the federal funds rate, the primary interest rate indicator for the economy. Once the fed funds rate was cut, however, every economist within earshot of a reporter was clamoring to be quoted on what a sage and courageous economic move it was.
So here came the Fed with its quarter-point cut in interest rates and, voila! The economy as we know it seemed to change overnight. The NASDAQ jumped more than 300 points the next day. That's an increase of more than 14 points-a record. The previous record was around 10 percent. What's more revealing, however, is that NASDAQ volume also set a record that day-more than 3 billion shares. The Dow Jones industrial average also jumped up nearly 300 points-299-point-60-and volume was more than 2 billion shares, almost 60 percent greater than Tuesday's trading.
Well, I don't like to drop names, but George W. Bush and I told you so...and several weeks ago. Just goes to show you what a little economic stimulus will produce. And if the Fed's quarter-point interest rate cut is good for the economy, and it obviously has been, the $1.3 trillion tax cut proposed by President-elect Bush will good for economic growth too.
Cutting interest rates lowers the cost of acquiring funds for businesses and keeps down the costs that they pass on to consumers, like the rates you pay on credit cards, bank loans, mortgages and other consumer credit financing. The Fed's quarter-point rate cut has had the desired economic effect-both economically and psychologically. But we need to sustain that economic activity to stave off a recession.
That's why the Bush tax cut makes sense. Reducing government receipts by $1.3 trillion dollars leaves that money available for investment, both personal and business. Businesses invest in expansion or newer projects, which means they buy more goods and hire more people. Personal investment, especially in stock markets, benefits businesses by making capital more easily available. So the total benefit from the tax cut, especially when it's across-the-board and affects all Americans at every socio-economic level, far exceeds the dollars invested.
The quality of economic activity fueled by the tax cut is also socially preferable to alternative investments by government. The Bush tax cuts will be good for the economy and his Administration but, more important, it's going to be good for all Americans. And that's called good government.