November 13, 2002
Face it. The economy stinks. Exhibit Number One: The Fed's decision last week tocut the target rate down to 1.25 percent, the lowest since John F. Kennedy wasin the White House.
Alan Greenspan and company are worried. This economy needs some juice or it'sgoing to fall back into a recession, or -- I almost dare not utter the word --deflation. Apart from energy and home prices, which are moving upward, mostother prices are heading or on the verge of heading downward. And if we go intoa vicious deflationary cycle all bets are off. Japan has been flat on its backfor ten years.
The Fed has almost run out of ammunition. Don't expect additional rate cuts tobail us out. So what's left? Fiscal policy.
Armed with majorities in both houses, Republicans are getting ready to push fora new package of investor tax cuts designed to light fires under companies andindividual investors: More and bigger investment tax credits, R&D taxcredits, capital-gains tax cuts.
You can see the logic: Companies slashed their capital spending two years agoand have done almost no capital spending since. So the idea is to cut theirtaxes and make capital spending cheaper. Individual investors are throwing inthe towel. So cut taxes on capital gains and -- presto -- investors have higherreturns. These inducements will bring forth a wave of new investment fromcompanies and individuals. Right?
Wrong. Businesses are not going to invest big-time until they know consumers aregoing to buy big time -- especially with all that under-utilized capacity stillout there. No company in its right mind is going to invest a lot of its scarceearnings in new machinery or new technology unless it thinks there are a lot ofcustomers for what the new machinery and technology will produce.
As to individual investors, forget it. No one's going to invest a lot of doughin anything that can't generate real profits. And where will the profits comefrom unless consumers start buying again?
This economy is not going to wake up because investors get tax cuts. It willwake up when consumers buy more. So the only fiscal policy that makes senseputs money directly into the pockets of average working people.
Cut the payroll tax! Exempt the first $15,000 of income from it for two years.That way you'll get consumers back into the malls. And when they start buyingmore, investors will start investing more.
