Bush looks to individuals to grow economy
By Sean Hackbarth
web posted January 13, 2003
If we really want to be picky, the economy isn't in a recession.
Economic decline began in December 2000, continued through
much of 2001, and ended in September 2001. U.S. economic
growth since then has actually been stronger than Germany,
France, Japan, and the United Kingdom.
The high priests who many look to to determine whether a
recession has taken place and how long it lasted are the
members of the Business Cycle Dating Committee of the
National Bureau of Economic Research. The committee decided
that the recession began in March 2001. They have yet to
determine when the recession ended or if the current economic
sputtering is part of a same downturn.
So we may be in a recession or we may not. Some may leave
that determination in the hands of economic watchers who are
duly employed. Others see us in a recession because of the
increase in unemployment. The NBER does take this element
into consideration when determining a recession. (The committee
says that employment is "probably the single most reliable
Last week the
Labor Department announced that the unemployment rate
remained at 6%, but the nation lost 181,000 jobs for the year.
During this economic downturn, 2 million jobs have been lost.
Anecdotal evidence also shows economic sluggishness. During
this Christmas season I saw more applications from a wider
range of people in years. Either people were looking for retail
jobs to make up for a layoff or to supplement lost hours in a
primary job. Also, all of us know more people than usual
dealing with layoffs or a reduction in hours.
A plus for the economy announced this week is increasing
productivity. If that continues to improve, wages should follow.
Better wages give consumers more spending power, which will
encourage businesses to take risks to capture that new spending.
Take job losses together with a tepid holiday season and even if
officially we are not enduring a recession, we certainly are going
through tough economic times. The question becomes what to
do about it.
Last week, President Bush provided
answer to the country. It entails ending the double taxation
on dividends, advancing the tax cuts passed in last year's tax bill,
increasing the child tax credit, and increasing the amount small
businesses can deduct for equipment.
It isn't surprising that economists don't agree on whether
President Bush's economic plan is good or bad. Cynthia Latta of
Global Insight told USA Today, "In the short term, it will
produce a little more activity. Long term, it will produce larger
deficits and therefore probably higher interest rates and probably
some tax increases later on." Mark Zandi of Economy.com said, "It's
a much-needed boost to a struggling economy."
The administration's number one economic opponent,
Paul Krugman sees little in Bush's plan to stimulate the
economy. "And instead of helping the needy, the Bush plan is
almost ludicrously tilted toward the very, very well off," he
writes. In Krugman's mind, the economic plan is Karl Rove's
(the "man in charge") way of fattening the wallets of the rich at
the expense of everyone else.
So, who's right?
Slashing the dividend tax would encourage more companies to
offer dividends to their stockholders. That would take money
out of company bank accounts and short-term investments and
let investors reallocate that capital in more effective ways.
Companies who issue dividends would also be less inclined to
try and cook their books to boost their stock's price. Dividends
have to be paid out periodically so pumping up earnings through
accounting tricks wouldn't matter so long as the dividend wasn't
Increasing the child tax credit from $600 to $1000 lets families
keep more of their money. Keeping more money in the hands of
self-interested individuals instead of an incentive-less government
is always a good thing.
Boosting the amount small businesses can deduct for equipment
purchases from $25,000 to $75,000 a year will encourage small
business to buy more. That should help manufacturers of capital
goods (especially technology). The problem with this portion of
Bush's plan is it's way too small an amount. A business could
easily reach that limit by buying a few medium-size trucks, and it
doesn't help medium and large businesses.
What is most encouraging about Bush's plan is pushing up the tax
cuts that were to be phased over years. The top tax rate would
be 35%; down from 38.6%. This provides an immediate signal
to entrepreneurs that risk-taking and moneymaking will be better
Giving the economy a swift kick in the pants is what President
Bush did with his economic proposal. By letting people keep
more of their own money, Bush is betting on the power of self-
interest and individual initiative.
Sean Hackbarth (email@example.com) comments on
political economy and culture at The American Mind (http:
Enter Stage Right -- http://www.enterstageright.com