|
Comment on this article |
Email this Article
|
|
News :: Miscellaneous |
|
Economy Needs Straight Talk -- and Action |
Current rating: 0 |
by Mark Weisbrot
(No verified email address) |
05 Apr 2001
|
As the stock market struggles to get out of a deep hole, and hardly a day goes by without the announcement of mass layoffs, the economy is very much on people's minds. Will the market bounce back? Is a recession
inevitable? Will a tax cut help jump-start the stalled economy? And what should the Federal Reserve be doing about any of this? |
There is a lot of confusion surrounding these
questions, and politicians have only added to it by trying
to spin the issues to suit their own purposes. The Bush
administration has used the slowdown to try to create a
sense of urgency around its proposed tax cut. The
Democrats, for their part, have exaggerated the impact of
the Administration\'s \"talking down\" of the economy.
But there are answers to these questions, and
perhaps surprisingly, often considerable agreement
within the economics profession -- despite all the jokes
about how you could string all the economists arm to arm
around the globe and still never reach a conclusion.
Let\'s get one thing straight at the outset: the stock
market and the economy are two different things. The
proliferation of 24-hour news channels with those little
red numbers, along with millions of day traders for whom
the stock market is one big internet casino, has caused a
lot of misunderstanding here.
In the last five years or so, an enormous
speculative bubble was allowed to grow in the stock
market -- not just in the technology-heavy Nasdaq, but in
the market as a whole. This bubble is now bursting, as all
bubbles eventually must. But even the evaporation of $5
trillion in stock market wealth over the last year does not
necessarily have to cause a recession in the economy.
The main impact of the stock market on the
economy is through what economists call the \"wealth
effect:\" households reduce their spending when their
assets lose value. Economists estimate this effect to be
about $3-4 of spending for every $100 of wealth. This
means that we would expect a cutback in consumer
spending of $150-$200 billion a year, as a result of
wealth recently lost in the stock market.
But the government could counteract this effect.
When the economy began to turn down, the Washington-
based Economic Policy Institute proposed an immediate
$500 tax rebate per person (e.g. $2000 for a family of
four). That\'s about $140 billion right there.
Even the Senate Democrats\' watered-down
version of this policy -- a $60 billion tax cut for this year
that includes a rebate of $300 per taxpayer (not per
person) and another $150 in tax reduction -- would
provide a significant stimulus.
By contrast, the Administration\'s tax cut, passed
by the House of Representatives, would provide very
little spending boost for this year. Instead, it would
rewrite the tax code to provide the bulk of its relief for
the wealthiest taxpayers, phased in over five years. The
richest one percent of taxpayers -- with an average annual
income of over a million dollars a year-- would get the
majority of the money. And the cost of this tax cut, which
is estimated over 10 years, would be at least 15 times that
of the one-time, $500-per-person rebate.
And then there are interest rates. Federal Reserve
Chair Alan Greenspan helped bring on the current
slowdown by raising interest rates six times, beginning in
June of 1999. Amazingly, despite the steep decline in
economic growth, the Fed has still not even taken back
the full amount of these unnecessary rate hikes.
Clearly the Fed is not doing its job. But again, on
this question we find confusion in the press between the
stock market and the economy. When further rate cuts are
discussed, the issue is often presented as a question of
whether the Fed should help bail out the stock market.
This really misses the point.
The goal of Fed policy at this time -- and budget
policy, too -- should be to prevent a recession, which
would hurt millions of people through increased
unemployment and reduced income. Although
unemployment remains low by historic standards, this is
misleading because it often takes quite a bit of time
before an economic slowdown shows up in the
unemployment rate. By the time that happens it will be
much harder than it is now to avoid a steep economic
decline.
A wiser government might have prevented the
stock market bubble from inflating in the first place,
although no one could stop it from bursting once it was
there. The present government -- the Administration,
Congress, and the Federal Reserve -- has plenty of
firepower available to head off a full-blown recession.
Will they use it?
Mark Weisbrot is co-director of the Center for
Economic and Policy Research (www.cepr.net) in
Washington, DC. He is co-author, with Dean Baker, of
Social Security: the Phony Crisis (2000, University of
Chicago Press).
|
See also:
www.cepr.net
|
