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The Capital Spending Bust
Super high stock prices in the Clinton years produced a capital-spending boom so excessive
that it turned into a binge. We are now full circle, says columnist Mort Zuckerman, we are in a capital spending
bust. No increase in investment is in sight because demand is just too slack. It is, he says, a very dangerous
moment where we must have action to sustain demand. Capital spending grew by ten percent in the last five years
of the 1990s. It has declined by 5.5 percent a year in this decade. Thus there is a need for tax cuts that will
provide more immediate stimulus than the administration's proposals.
The savior of the Republicans may be the California Chairman of the House Ways and Means Committee, Rep. Bill Thomas.
Robert Novak has called Thomas one of the smartest, best informed, least liked and most feared members of Congress.
Faced with a Senate in absolute shambles, a White House effort to sell the Larry Lindsey tax cuts that is going
nowhere and a loyal opposition whose proposals are basically "give every voter $300 again," Chairman
Thomas has crafted what may well be the answer. It's an old supply side standby - reduce capital gains and accelerate
depreciation. However, there is an innovation - treat dividend income the same as capital gains. The current 20
percent tax rate on capital gains would be reduced to 15 percent and the current 10 percent rate would decline
to 5 percent. Dividend income would be treated identically, a substantial but not 100 percent reduction. The total
package as passed by the committee is $550 billion over ten years.
The Democrats objected by saying that middle class families don't have capital gains and therefore won't benefit.
Their proposal, which has no chance and is just to build a political record, has much smaller, one-year cuts and
directs aid to the states to cover their fiscal shortfalls.
In his testimony, Fed Chairman Alan Greenspan noted that tax cuts of a size that could pass Congress are unlikely
to provide a timely stimulus and would be trivial compared to the size of the U.S. economy (say $45 billion in
an $11 trillion economy). He also suggested that by the time Congress finished talking, the economy would be well
on its way to more rapid growth. The caution the Chairman raised is a valuable one, deficits can come from too
much spending, not just too little income.
With the release of the new Bush budget, Mitch Daniels, Director of OMB, tendered his resignation. Though spun
as a budget cutter, the truth is that the Daniel's budget grew by 30 percent over the last Clinton budget. Ashen
Moore has calculated, since the Republicans took over the Congress in 1995, the federal budget has risen 50 percent.
Discretionary programs have been budgeted for four percent increases. By the time Congress has finished with administration
figures, they usually double. In fact, the discretionary budget has grown by 15 percent in Bush's first two years
in office. That's more than the Clinton budget expanded in his first four years. While the White House has said
that domestic programs should be curtailed in war time, nothing has been done. Both parties prefer deficits to
trimming federal programs.
The final issue to watch in the coming tax debate is the poison pill inserted by the Democrats on the last Bush
tax cut. If the various provisions of that bill are not made permanent, in 2011 American families will be given
one of the largest tax increases in history. Columnist Tom McClusky estimates that the average taxpayer would have
to pay $1,040 more per year and a family of four making $36,000 would be out an additional $2,000. Watch carefully
to see if the existing tax cuts are made permanent or ignored by Congress. Gimmicks abound in the current debate.
The issue for Washington is that America is not in an economic decline. Most of us still live with a high degree
of prosperity. The problem is that the current stagnation breeds uncertainty and way too many contradictions. Economist
Robert Samuelson puts it this way. Annual U.S. economic growth from 1996-2000 averaged about 4 percent. Since then,
it has averaged about 1.5 percent. That is just a bit above population growth so it produces a net zero. What has
happened is that low interest have given people new cars and refinanced homes. There are 130 million non-farm jobs.
The median price of residential real estate has been rising at over 7 percent a year. Getting 7 percent on the
total value of the home is a heady return on equity.
In the glow of the previous boom, consumers and businesses borrowed heavily and spent freely. Both now need to
rebuild savings. There is huge surplus capacity because of over-investment in technology - some of it Y2K related.
Europe and Japan have no help to offer by way of trade. Global demand remains weak. Surplus capacity depresses
new investment. Gluts depress prices.
The Democrats and Republicans engage in petty debate over dividends to avoid the hard questions. The worldwide
bust defies textbook economic models and therefore, Samuelson says, defies textbook remedies. The danger is that
a hope for recovery may mask a slow motion unraveling that never really looks like a crisis.
Columnist Arnold Kling raises one final point. Noting that it is politically unacceptable to do nothing about recessions,
he asks "What if the federal government is less well positioned to solve the problem than individual decision-makers
in a decentralized economy?" Over the next two weeks we can then hope that Congress does as little harm as
possible. If it can't pass something like the Thomas bill, it might be better to do nothing, hold down the deficit,
let Greenspan lower rates in June and wait for the economy to right itself.
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