You most likely heard Alan Greenspan chastise fraudulent
accountants and corrupt corporate leaders during hearings this week on
Capitol Hill. But in addition to his "infectious greed" tongue-lashing, our
Fed chairman gave a fairly upbeat assessment of the economy, with the
central bank actually raising its economic growth
targets for this year and next.
This is an important stance by the central bank, as our stock
market is now well undervalued relative to the rising economy and improving
profit picture. With steady long-term interest rates in place, the major
index averages are 30 percent to 40 percent too cheap right now. Greenspan
let us know that this disconnect is not the norm, and that investing America
is standing on firm economic ground.
Importantly, Greenspan indicated that the Fed is likely to move
the key fed funds interest rate up and not down. The promise of an upward
adjustment -- which most likely will not occur until the winter or next
spring -- means that Greenspan believes the economy is actually heating up.
As usual, the chairman made no mention of the Fed's primary
function -- which is to create money. Literally, that's just what the
central bank does -- it prints greenbacks -- but Wall Street is left to
guess how much new money is heading into the system. Judging by recent
trends, the central bank could have sped up the printing presses in light of
some headline bankruptcies (such as WorldCom) and the resulting shrinkage of
asset values and investor wealth. Nevertheless, the Fed has been injecting
new money into the system at an appropriately rapid 11 percent yearly pace,
compared to roughly 5 percent a year ago. On the whole, Fed monetary policy
is currently pro-recovery.
And although the media don't seem to recognize it, that's just
what we're doing: recovering.
In recent days, a gangbuster increase of the index of industrial
production went virtually unreported. But this is arguably the best gauge of
the current health of the economy, signaling continued positive growth in
GDP. With a June rise of eight-tenths of one percent, industrial output in
the United States has grown nearly 6 percent at an annual rate over the past
three months. And within that number, high-tech output is moving ahead at a
27 percent rate. Even business-equipment production has increased slightly
over the past two months, the first back-to-back rise in capital
expenditures in quite some time.
And believe it or not, the technology sector that has been
utterly trashed by the stock market is growing rapidly right now.
Semiconductor production is rising at better than 40 percent annually, and
information-processing equipment is spiking by nearly 5 percent (compared to
a 20 percent decline last September). Meanwhile, the production of old
economy (or non high-tech) industrial equipment is increasing by nearly 10
percent. These big numbers suggest that business-recovery skeptics are
Of course, there are glitches in the optimistic scenario. There
always are. As Congress moves to deal with corporate corruption and
accounting fraud, over-regulation becomes an economic threat. Some
regulatory cost increases may be a necessary evil, but these could be offset
with regulatory reductions -- especially paperwork reductions -- if
legislators are interested in promoting economic growth.
Tax reforms could also help the corporate recovery. Ending the
limited tax deduction on executive compensation would remove the incentive
for stock-option grants that create harmful short-run stock-price boosting.
Tax-deferred stock grants, held for the duration of employment, are a better
Dividend payouts, meanwhile, could be made all or partly tax
deductible, putting them on the same tax footing as interest payments.
Dividends are credit-enhancing measures that confirm to investors that
plenty of spare corporate cash is in the bank. Boosting dividends would also
create an incentive for businesses to reduce the large overhang of corporate
debt, which has been a big problem for investors.
Outright corporate tax-rate reduction would aid U.S. businesses
in competing internationally, too. Right now, out of the top 30 industrial
countries, we are the 24th worst corporate-taxer. That stinks.
We should also consider a turnover approach to capital-gains
taxation: If a stock sale is soon reinvested, it shouldn't be treated as a
taxable event. This would keep the money in the market.
Additional accounting oversight, more ethical corporate
behavior, increased independent governance of companies and full enforcement
of existing laws are necessary to restore worldwide confidence in U.S.
business. But lawmakers should recognize that business expansion and
employment growth are the ultimate goals.
So far the Fed is doing its job. Can we say the same for