President Bush will interrupt his vacation in Crawford, Texas, next week to hold a brainstorm session with his economic team about how to create jobs. Some Commerce officials have floated the idea of creating a new position of "manufacturing czar," while others are proposing a number of tax credit schemes to encourage companies to hire more workers. Newt Gingrich, sounding like John Maynard Keynes, suggests increased spending on roads and military contracts. All of these suggestions, though well intended, are profoundly misguided and not only would not help in the short-run, they would be counterproductive and economically harmful in the long-run.
This is no time to panic, but it is a time for action, and it is a time to avoid mistakes that would undo the economic progress already made. Gimmicks like "manufacturing czars" only invite the mischief of bureaucratic overreach into the economy. New tax credits simply distort market signals and further pollute a fetid tax code. Public-works spending projects on roads and corporate welfare for the military-industrial complex are a throwback to an earlier time of panic when we didn't know better and our fear of fear became palpable in outlandish government interventions and spending programs.
If I were in Crawford, I would encourage the president to adopt a four-pronged strategy for economic growth heading into the election year: 1) Rescind the steel tariffs and other harmful trade restrictions such as the ones on soft timber from Canada, which would increase manufacturing jobs as well as reduce costs for businesses and consumers. 2) Reduce agricultural subsidies. While it may not be politically possible to eliminate all agriculture subsidies, 80 percent of which go to large corporate farms, they should be sharply reduced to help our current budget situation, reduce prices for consumers and give developing countries a fighting chance to enter the global economy. 3) Urge Congress to allow businesses to deduct 100 percent of their investments in plants and equipment for the next three years, which would reinvigorate capital formation and business expansion. 4) Put at the top of the administration's agenda National Enterprise Zones of Choice, which would demonstrate the economic power and efficacy of getting the tax code right in economically depressed urban and rural districts, including U.S. territories, as well as areas in adversely affected by free-trade initiatives.
Many key economic indicators suggest the economy is returning to a growth trajectory. Perhaps the best leading indicator, the stock market, has expanded more than 20 percent since enactment of the 2003 tax cut, and corporate profits are up nearly 30 percent, as well. Also, manufacturing orders are rising, equipment and software purchases are up 7.5 percent, consumer spending remains strong and productivity gains continue unabated. But there are also some reasons for caution.
Although GDP growth reached 2.4 percent in the second quarter of this year, the private economy only grew at a rate of 1.3 percent. Thus, spending by the federal government accounted for much of the unexpected GDP growth. Another area pessimists have focused on has been the sudden rise in interest rates. The interest rate on 10-year Treasuries has increased from 3.1 percent in early June to over 4 percent today. Some of this sudden increase can be attributed to market expectations of further Fed monetary easing triggered by comments by Fed Chair Alan Greenspan - expectations that never materialized. That said, much of the growth in real interest rates is another sign of renewed economic vigor.
Nonetheless the Democratic presidential wannabes, in search of a winning issue, have been falling over one another to castigate Bush's economic policy. Their alternatives can be summed up very succinctly: higher taxes, more spending (on universal health care, education and just about everything else) and protectionism. The democratic candidates for president are in danger of remaking their party as the protectionist party. On free trade, Rep. Richard A. Gephardt said, "I am the one who not only voted against but led the fight against NAFTA and China free trade and Singapore and Chile." Sen. John Kerry, who supported free trade in the past, asserted that he would vote against a free-trade agreement covering the Western Hemisphere and promised that as president he would never sign a trade agreement that forces American workers to "rush to the bottom."
With opponents rushing that far to the left, the president need not join them with counterproductive initiatives. Instead, Bush can do some positive things immediately by staking his ground as the free-trade president he is by rescinding the steel tariffs and restrictions on soft timber, and reducing agricultural subsidies. He can also increase capital formation by proposing "expensing" legislation. Most importantly, by embracing National Enterprise Zones of Choice as a signature issue, Bush can provide incentives for individuals to live and build communities within the zones, reward economic dynamism and promote economic growth and opportunity as well as reduce disincentives people now face when undertaking productive activity.