Economy Needs Helping Hand to Hold Steady

Posted: Jan 07, 2008 12:01 AM
Economy Needs Helping Hand to Hold Steady

WASHINGTON -- Troubling signs that the economy is shifting into a lower gear have worried Republicans, who are calling for preemptive tax cuts this year to keep it running on all cylinders.

Slower growth is the last thing the GOP needs in an already volatile political environment, but a steeper decline at this early juncture in an election year would make their goal of holding onto the White House an even tougher nut to crack.

I still think there are a lot of strong fundamentals that bode well for our situation and I'll get to them in a minute. But the economy faces a lot of heavy lifting in the coming month -- with oil topping $100 a barrel, higher gas prices, a weaker housing sector and deeper consumer pessimism -- that calls for a booster shot to strengthen its stamina.

Tax cut architect Jack Kemp and economist Martin Feldstein are among those who have called for new incentives to boost economic growth, and the immediate-tax-cut camp is gaining wider support in Republican circles.

"The economy isn't headed for a recession. But growth is slowing down. What the economy needs now is a new round of pro-growth tax cuts," asserted GOP strategist Cesar Conda, who was Vice President Dick Cheney's chief domestic adviser.

"My top three tax cuts would be first-year business expensing, a cut in the corporate rate, and a cut in the corporate capital gains rate. All of these would produce a burst of economic activity," attested Conda, who is advising Mitt Romney.

When the current President Bush took office, his first domestic initiative was to cut taxes. He called it an "insurance policy" to protect the U.S. economy from any unforeseen circumstances. No domestic policy in recent decades was more prescient or better timed.

Bush's tax cuts kept the economy on its feet through the Sept. 11, 2001, terrorist attacks, the corporate accounting scandals that shook Wall Street, Hurricane Katrina and several international upheavals.

Now, as the economy enters 2008, there are persistent signs that additional insurance is needed to strengthen investor and business confidence both at home and abroad. The nation's manufacturing sector, whose month-to-month gyrations appear as volatile as ever, is looking shakier as it struggles with the prospects of higher energy costs and excessive taxation.

The Institute for Supply Management whose index measures manufacturing activity, fell to 47.7 in December, down from 50.8 in November. A reading below 50 suggests a contraction.

The Commerce Department said last week that building expenditures on single-family homes fell 5 percent in November, the largest one-month decline since 1993. Offsetting that somewhat, private nonresidential, mostly commercial construction increased by 1.7 percent, far more than expected.

While these and other sectors bear watching, it's important we notice a lot of positive economic developments that the obsessively pessimistic network-news shows ignore.

The U.S. economy ended 2007 "with a whine rather than whimper," economist Kevin Hassett writes on his Bloomberg financial news blog. While bad economic news "receives the lion's share of media attention" the fact is that "this past year was a pretty good one," Hassett wrote.

Hassett has more good news. Despite the stock market's volatility, "equity markets posted solid gains and price multiples are still low." The Dow Jones Industrial Average was up by about 7 percent for the year. The Nasdaq Composite Index was up more than 10 percent. The S&P 500 Index rose more than 10 percent. Households are wealthier. The Federal Reserve reports that total household net worth by the third quarter rose to $58.6 trillion, up from $56.1 trillion at the start of last year.

The global economy's gross domestic product grew last year by nearly 4 percent, according to Moody's forecast. That's great news for us because it meant a wealthier world economy was able to buy more of our exports, which it did.

The weaker dollar has made U.S. products less expensive and thus much more competitive abroad. "Exports have boomed, and the real trade deficit has narrowed," Hassett says.

Meantime, annual GDP growth is estimated to be about 2.5 percent for all of 2007, despite the housing construction downturn. Inflation was up 2.3 percent by November -- roughly half a point lower than it was in 2006. The budget deficit fell sharply last year to $168 billion, from $248 billion in 2006, beating all the forecasts.

Let's not forget the Fed has also acted preemptively as well, with interest rate cuts and infusions of liquidity in financial markets to keep the economy from falling into a recession, and will act again as needed.

Nevertheless, the economy faces enough challenges to warrant some well-targeted tax cuts sooner rather than later. Cynics will say that the Democrats lack political incentive to cut taxes in an election year, when they know a weakened economy will help them win in November.

But even Democratic Rep. Charlie Rangel, chairman of the tax-writing Ways and Means Committee, proposed a corporate tax cut in last year's tax bill. It goes without saying that he would get a lot of GOP support for a pro-growth bill. How about it, Charlie?