Rational semi-exuberance

Posted: Feb 18, 2001 12:00 AM
WASHINGTON--Even when Alan Greenspan is mildly happy--as happy as a central banker gets--his demeanor resembles that of Woodrow Wilson when learning about the sinking of the Lusitania. Even (BEG ITAL)rational semi-exuberance did not manifest itself in Greenspan last week when he told Congress that although ``downside risks'' still predominate, January's retail sales were unexpectedly strong, that many economic indicators so alarming in December now are much less so, and that the slowdown may not become a downturn. Greenspan's testimony left room to hope that the graph of the economy's performance may be V-shaped, as steep up as it was down, and may weaken the weakest argument for President Bush's proposed tax cuts--that the cuts are urgently needed to stimulate the sputtering economy. But Greenspan's testimony also blunts one argument against the cuts. Critics of Bush's cuts are seizing upon the obvious with a sense of original discovery, and then compounding their error by drawing an inapposite conclusion from the obvious. They are saying that the government's projections of coming surpluses may be wrong. Well, yes. The projections probably are wrong. And on recent evidence, that is good news. Ed Kerschner, chief investment strategist at PaineWebber, who forecast the market correction that began last spring, recently told Fortune magazine that government economic numbers frequently are announced, in effect, this way: ``Here is the data you've been waiting for, and here is the revision of the last data.'' Government has no choice but to make educated economic guesses and for several years has been revising upward its surplus projections. In the 14 months since Bush first proposed his cut, now calculated at $1.6 trillion over 10 years, the surplus forecast has risen $1.5 trillion. Growth has been unusually fast--and constant. Between the end of the Second World War and the early 1980s, recessions occurred on average once every 4.7 years. Since then, with the exception of three consecutive quarters of contraction in 1990-91--the mildest recession since the war-- we have had 18 years of uninterrupted growth. So, 40 percent of persons now old enough to be trading stocks have never known a serious bear market. When America's economy was primarily agricultural, Kerschner argues, it had annual cycles, the leading indicator being annual rainfall. In the primarily manufacturing economy of the industrial age--until, that is, recently--there were cycles of inventory accumulation and depletion. Today most economic volatility concerns inventory. When things get made, they are either sold or added to inventory. But nowadays inventory levels are generally low, by historical standards. This, Kerschner says, is partly because low inflation decreases the incentive to build inventories as hedges against price increases. And partly because of information efficiencies that make possible ``just-in-time manufacturing.'' And partly because we are increasingly a services economy and services are not inventoried. Nevertheless, Bush, a fierce competitor, seems determined to defeat Greenspan in the Woeful Countenance Competition. He described the January retail sales as ``one good statistic among a sea of some pretty dismal statistics.'' Given the reluctance of the political class to let go of other people's money once it is within the Beltway, it is understandable that Bush has hitched his argument for the tax cut to the slowing of the economy. But are we so far sunk in statism that we actually need to find a narrow, immediately utilitarian reason--in this case, ``stimulus''--for the government to release its grasp on (a fraction of) the money is has raised far in excess of its current needs? Economics should not be sovereign where political philosophy should rule: No macroeconomic theory about management of the business cycle is necessary to justify ending substantial and chronic overtaxation, which is what the projected surpluses are. It is repellent to hear the political class complacently discussing tax cuts as if they are just one of three options for using the surplus, in no way morally superior to spending or debt reduction. The nation's economic product is not the government's property. The gusher of money that comprises the surplus did not well up, like oil from Spindletop in 1901, because government punched a lucky hole in the ground. The money got into the government's hands because the government extracted it from productive Americans, using tax rates that are too high because they extract too much. Judged by their projected results--large, chronic surpluses--the rates do not establish a reasonable relationship between pressing public needs, as distinct from political appetites, and the private sector's wealth-creating capacity.