Monetary deflation continues to suck the oxygen right out of the world economy, and markets last week revealed lost hope for a sustained recovery any time soon. There is now a real concern that price deflation will spill over into residential and commercial real estate, and then look out!
It's essential for the White House and the Treasury Department to prevail upon the Fed to end the deflation by ceasing to target interest rates and beginning to target price-sensitive commodities with the exchange rates, the price of gold and the spread between interest rates on different maturities as reference points. And the White House and Congress should stop arguing about the surplus when what counts is not the size of the surplus but the size of the economy.
They should begin to work aggressively on putting together a pro-growth package such as implementing the income tax rate cuts immediately; reducing the capital gains tax rate; accelerating depreciation write-offs for investment in plants, equipment and technology; re-enacting the moratorium on Internet taxation; and repealing the death tax immediately or at the very least cutting the rate to 15 percent.
Over the Labor Day weekend, hope for a growth package rose temporarily with a bipartisan call to cut the capital gains tax rate by Senate Republican Leader Trent Lott, House Speaker Dennis Hastert and Democratic Sen. John Kerry. Then, at 2:42 p.m. on Wednesday, those hopes were dashed as the wire services reported that the White House preferred to "wait and see" before deciding whether to agree to cut the tax on asset appreciation. We didn't have to wait long to see the market's reaction. Less than 10 minutes later, at about 2:52 p.m., the sell-off began and it hasn't stopped.
On Thursday, Capitol Hill Republicans reaffirmed their obsession with a fiscal "lockbox" that pretends amassing Social Security surpluses strengthens the retirement program. By Friday, the Dow Jones industrial average had plummeted 300 points and the Nasdaq had fallen below 1,700 to a 2 1/2-year low. Corporate profits projections were gloomy, unemployment reached a four-year high of 4.9 percent and there were continued reports of government actions that could have ominous economic effects.
USA Today added to the economic gloom, reporting that overrapid retirement of the national debt may drive the Federal Reserve Board to ask Congress to let it buy private corporate bonds due to the shortage of federal bonds with which to conduct monetary policy. Not only would this subject private companies to political meddling by the Fed, it would open the door for other government agencies, such as the Social Security Administration, to purchase private assets.
Bipartisan debt-retirement mania and fiscal austerity on Capitol Hill, deflationary monetary policy at the Fed and consideration of nationalizing a large segment of the bond market, foolish continuation of a Justice Department jihad against the risk-takers and innovators who drive the New Economy - and the president is advised to "wait and see"?
It is time to stop all the happy talk coming out of the Fed, the Treasury, Congress and the White House that "prosperity is just around the corner." As Bear Stearns Chief International Economist David Malpass observes, "Policy-based recessions don't end through the passage of time, they have to be stopped." With financial asset values continuing to plummet and layoffs that once were confined to the tech sector spreading to the manufacturing and service sectors, we've clearly run out the string on the strategies of fiscal austerity and monetary deflation. We desperately need a finely honed growth agenda from the White House and a new operating procedure at the Fed, and we need them now.
Cutting capital gains and death taxes is a good place to start. Both ideas enjoy substantial bipartisan support and could readily pass the Congress if the Democratic leaders would allow their members to vote their consciences rather than forcing them to toe the party line.
It is important for the president to put the idea of accelerating the income tax rate cuts on the table and promote it vigorously. Immediate substantial reductions in the top income tax rate and capital gains tax rate would have a powerful effect on economic growth and increase revenues over the long run. We should be using up the surplus today to cut tax rates, spur economic growth, add value to assets and generate more revenue.
The Treasury Secretary says we can't afford to cut capital gains taxes, and President Bush's chief economic adviser contends we don't need to anyway because we already have too much invested in plants, equipment and technology that are sitting idle. We can't afford not to cut the capital gains tax. We must do so in order to increase the after-
tax return on investment, which will bring all that idle capital and labor back into production.