The White House put on a much ballyhooed Economic Forum in Waco, Texas, last week, involving 250 hand-picked "experts" and "average Americans" with the stated purpose of discussing "where our economy stands, the impact of policies we put in place and the steps we are taking." How disappointing that not a single supply-side economist was there -- not Art Laffer, David Malpass, Richard Rahn, Larry Kudlow, Bruce Bartlett, Gary Robbins, Steve Entin, Brian Wesbury, David Gitlitz, Dr. Robert Mundell or Dr. Judy Shelton. The message that came out of Waco was essentially "be happy, don't worry, the fundamentals are strong, economic policy is right on the money and everything will be just fine -- and oh, by the way, we may allow you to deduct more losses from you income taxes." With all due respect, I beg to differ.
By all accounts the economy is still weak. Unemployment is up, the Nasdaq is down, business investment remains weak, earnings are soft and monetary policy remains precariously close to turning deflationary again. Fed Chairman Alan Greenspan tells us the economy weak but he's not going to do anything about it. In fact, the Fed is incapable of correcting course because it remains fixated on targeting interest rates rather than calibrating monetary policy on the basis of market price signals.
Unemployment has risen from just 4 percent in 2000 to a 10-year high approaching 6 percent today. This may be great news for Keynesians who believe 6 percent is "full employment," but the rest of us know we can do better. The Dow now hovers around 8,800, having lost almost 12 percent of its value during this year alone and nearly $7 trillion dollars since its peak in March of 2000. The telecom sector remains depressed and shows no discernible signs of improvement, and spending on information technology has flat-lined. Meanwhile, corporate profits remain weak.
Economic policy is not right on the money. Tax rates are too high. The administration's own numbers project that tax revenues as a percentage of national output not only will continue at post-World War II highs (over 19 percent of GDP) but actually will increase throughout the decade, even as the 2001 tax cut is phased in.
Another great disappointment was hearing President George W. Bush call our tax code the best in the entire world. I don't know what tax code he is talking about when you consider the pro-growth tax codes in Hong Kong, Singapore, Ireland and even Russia, where President Vladimir Putin has put in a single 13 percent income tax rate. You have to give the president the benefit of the doubt and think he simply got caught up in the rah-rah atmosphere of his own public relations event (a political convention without the balloons, in the words of Washington Post columnist Mary McGrory) that made it very difficult for anyone there to critically assess our true situation.
To his great credit, there was one individual present in Waco who had the courage to speak truth to power: Curtis McGuire, an African-American small businessman, who said, "Mr. President, we need to reduce tax rates and make the tax code simpler."
It was also disheartening that no one in Waco discussed how the government overregulates the economy, especially the technology sector, where a regulatory and anti-trust straitjacket remains firmly in place. A protectionist tide continues to rise as the president's tariff increases drive up the price of steel and lumber, the only commodity prices that are rising. Meanwhile, endless talk about the future benefits of free trade at the culmination of excruciatingly ponderous multilateral trade negotiations (even under the recently enacted fast-track negotiating authority) substitutes for concrete unilateral actions that could open up trade tomorrow.
It staggers the imagination to think that you could have an economic forum and have no serious discussion of monetary policy, but they did in Waco. The Fed's brief relaxation of deflationary monetary policy may have come to an end as it finds itself having to restrain liquidity growth in order to keep the overnight interest rate from falling beneath its target. Any doubt that the market demands more liquidity than the Fed is able to supply under its interest-rate targeting procedure is dispelled by the fact that the cost of overnight money at 1.75 percent is higher than the 1.6 percent cost of six-month paper.
In Waco, no one raised the question of why wholesale prices have been falling over the past several months and what that may imply for the return of deflationary pressures. Producer prices fell 0.2 percent in July and have fallen 1.1 percent during the past 12 months. The consumer price index, even after significant improvements since 1996, still overstates price inflation by about .65 percent, and in July it rose only 0.1 percent, which means prices really declined.
Airlines are cutting prices in a desperate attempt to fill airplanes; meanwhile, some of them go out of business as losses become overwhelming. Clothing manufactures are cutting prices. Automakers continue to offer discounts and zero-interest loans, and since the CPI only captures changes in sticker prices, the true extent of price cutting on autos is considerably understated.
Given the current state of our economy, it is not sufficient to simply "stay the course." We are presently off course and in need of corrective action. We are all looking to the captain to help us get the wind back in our sails, but in order to do so we cannot get defensive about policies already passed; quite the contrary, we must get aggressive about policies that need to be implemented. Amen to Curtis McGuire.