NCPA - National Center for Policy Analysis


February 14, 2008

The current mortgage meltdown closely resembles what happened after the technology industry bubble burst at the end of the Clinton years. What Congress fails to understand, now as then, is that America is suffering from an investment slump driven by falling asset values, not a Keynesian consumption drought, according to Stephen Moore, senior economics writer for the Wall Street Journal editorial board.


  • Only after President Bush's 2003 investment tax cuts -- the second attempt Congress and the administration made at stimulating the economy -- did the economy start to gain speed.
  • The key was to cut capital gains and dividend tax rates to 15 percent, from 35 percent, and to offer new tax write-offs for businesses investing in new plants and equipment.

The investment tax cuts had positive effects on the economy, says Moore:

  • Almost from the day the tax cuts were enacted the stock market capitalized the value of the lower taxes on corporate profits and capital gains.
  • Within months, the Dow Jones Industrial Average rose nearly 10 percent; and, we now know, the investment slump was converted into an investment boom.
  • Business capital spending, down 4.8 percent in 2001 and 6.1 percent in 2002, surged in 2004 by 7.4 percent and in 2005 by 9.5 percent.

And, like earlier in the decade, the real economic drag today is from a slowdown in investment, says Moore.  Gross private investment topped $1.9 trillion in 2006.  Last year it fell by $88.3 billion (with more than half of that drop coming in the fourth quarter alone).  Most of that decline came in residential housing, but other areas, such as business spending are slowing too.  Sending tax rebates and cutting interest rates with the hope of sparking consumer spending -- without a corresponding increase in output, fueled by tax cuts -- will likely give us higher prices and little else.

Source: Stephen Moore, "The Investment Slowdown," Wall Street Journal, February 14, 2008.

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