Posted on 04/08/2002 2:22:42 PM PDT by cody32127
Capitol Hill (CNSNews.com) - The chairman of the House Ways and Means Committee says, based on early estimates, the recession that began in March 2001 is over, and tax cuts passed before Democrats seized control of the Senate deserve much of the credit.
"The economy is clearly rebounding ... and the recession appears to be the mildest on record," said Rep. Bill Thomas (R-Calif.), in a letter to Republican House members.
"The tax cut passed last summer is a major reason the recession was so mild," he continued, "and the recently passed job creation legislation is a large contributor to the increase in investment and rebound in consumer confidence."
Thomas blamed Democrats for delaying the recovery, by holding up the Job Creation and Workers Assistance Act.
"Because passage of our growth insurance legislation was postponed for months due to Senate Democrats' stalling, businesses have delayed the purchases of new equipment, and the economy stalled further, until now," he added.
Thomas points to the 1.7 percent increase in gross domestic product (GDP) for the fourth quarter of 2001, a period when most experts expected the economy to remain flat at best. He believes the numbers for the first quarter of 2002, which won't be available until April 26, will indicate a 4 to 5 percent increase in the GDP annual rate.
The Michigan Consumer Sentiment Survey and the Conference Board's Consumer Confidence Index also "surged" in March, according to Thomas, who says these indicators "point to the effectiveness of the recent growth insurance legislation."
However, joblessness increased in March despite an upturn in the number of jobs available. The Labor Department reports the jobless rate last month increased two-tenths of a percent to 5.7 percent, while the number of Americans working rose by 58,000.
Economists had predicted only a 5.6 percent unemployment rate. Government jobs increased more in March, by 37,000, while private companies hired only 21,000 new employees.
Even so, Thomas says he is confident that "hard-working Americans further motivated by the diminished tax burden," will continue to spend and invest, improving the economy even more.
"We will continue to watch economic indicators carefully to ensure the economy accelerates to full speed quickly," he concluded.
Tell it to my friends in the telecom industry, where its an outright depression. Many large, well-known companies have cut staff by over 50 percent, such as Lucent and Nortel. Of course, this isn't the fault of tax cut or monetary policy. There was gross overbuilding of fiber and telecom capacity, fueled both by a Wall Street mania and by government actions in the form of the Telecommunications Act of 1996. That made it appear profitable for a host of new competitors to enter business in competition with the Bells by mandating that the Bells give them connection access to their networks. Many of these competitors, the so called CLECS (co-exchange located carriers) had their IPOS, their brief day in the sun, and flamed out. The equipment suppliers had a boom and a bust. An interesting episode.
In terms of lost wealth and lost economic opportunity this is one of the worst economic downturns our country has ever experienced.
Interesting point, but when you consider that much of the "wealth" that was lost was nothing more than Enron-style smoke and mirrors (in other words, it never existed in the first place), this hasn't been bad at all.
Rather than reply "them's fightin' words", let me simply ask, "How so?". I'm not saying that the recession isn't mild in other areas of the economy, or that the tax cuts shouldn't have been made. I'm simply pointing out an area I know about where things are different. How is that a problem for you?
I know. Its just interesting that the divergence is so dramatic in a segment widely thought to have no downside. In the past we've had housing recessions, car recessions, and so forth. High-tech has always had cycles, this is a deep one.
During booms and busts and for as long as capitalism has existed, companies have been caught cooking the books. What makes Enron exceptional is the size of the company, however there have been no other Enrons, and it should be noted that most of the wealth lost occurred long before the Enron mess was discovered and the company went under. The amount of wealth lost reflects the lost economic opportunity caused by Greenspan aggressively removing liquidity from the system at exactly the wrong time. Your whole smoke and mirrors scenario can't be backed up by the facts.
We have the lowest public debt to GDP ratio of all the large industrialized nations. Even so, the best way to pay off the debt is to grow the economy, and the best way to do that is to leave as much money as possible in the private sector and reduce government regulations.
Enron was a specific case of a "major" company that was caught cooking the books, but when you look at areas outisde the corporate world you'll find that Enron-style accounting is the norm.
I never considered Enron a major company even when it reached #7 on the Fortune 500 list. A company that trades worthless pieces of paper, and reports gross sales of commodities (instead of profits) as revenue is a third-rate company as far as I'm concerned. This is proven by the fact that energy prices didn't move an inch even after the largest trader of energy contracts went belly-up.
Back to Enron-style accounting in the world in general. I contend that the "economic boom" of the late 1990s was primarily driven by tax policy, not by favorable economic conditions. As a result of the 1993 Democratic tax hikes, the U.S. was left with a top income tax rate of 39.6% (I believe the numbers I'm using are correct, but you'll get the point even if they are off by a little bit). After the 1995 Republican tax cuts, the top capital gains tax rate was reduced to 20% for assets held longer than 18 months (later reduced to 12), but income tax rates stayed the same. As a result of this spread between the top income tax rate and the top capital gains tax rate, smart people simply moved their money out of income-producing assets (such as bonds and value stocks) and into assets that produced little income but had enormous potential for capital gains (real estate and growth stocks). In other words, the two strongest areas of the "boom" (real estate and growth stocks) were driven only by people chasing higher after-tax returns.
There are other impacts of tax law on the stock market. Because "bracket creep" has pushed middle-income earners into higher tax brackets, they have been driven to put their money into the last two major tax shelters -- retirement accounts and home mortgages. Much of the stock market growth over the last few years has been driven by nothing more than large institutional investors plowing huge amounts of "play money" (pre-tax dollars) into stock mutual funds. This explains why investors continued to pour money into the stock market even after P/E ratios had reached record levels.
The residential real estate bubble will burst next, because its foundation is no more stable than the stock market was. A home is different than most things you buy in everyday life because the cost is amortized over a long period of time. As a result, people think of affordability not in terms of the overall price, but in terms of its monthly cost.
Consider the example of a person who pays $325,000 for a home and is paying it off over 30 years at a fixed rate of 8.5% (assume the entire home is mortgaged for the sake of this example). This comes to roughly $2,500 per month in mortgage payments. Here in the New York area I've heard countless stories of people who bought a home for $325,000 a few years ago and saw it rise in value to $375,000 in a year or less. Imagine that -- a $50,000 return on your investment in one year.
The problem is that the home isn't really worth $375,000 -- it's worth $2,500 per month. The increased "value" of the home was not caused by a change in market conditions (location, quality of the school system, etc.) but was the direct result of a reduction in interest rates. When nterest rates declined from 8.5% to 7%, a person looking to buy that same home can pay $375,000 and will have the same monthly mortage payment of about $2,500.
The person who buys a home for $325,000 and sells it a year later for $375,000 may actually get a $50,000 return on his investment, but this is only a worthwhile return if he is leaving the area for good or retiring to a much smaller home. If he is going to buy in the same area, he'll find that for the same $2,500 monthly mortgage payment he can afford a $425,000 home ($375,000 mortgage plus his $50,000 down payment).
This is all going to come crashing down here in the New York area because of enormous property tax hikes. A person who paid $2,500 per month in mortgage payments plus $500 per month in taxes was able to afford $3,000 in monthly homeowner costs (let's neglect insurance and maintenance for this case). If his taxes go up to $700 per month, then the "monthly mortgage affordability" in his area goes down from $2,500 to $2,300. According to my calculations, the guy who bought his home for $375,000 and paid $6,000 per year in property taxes will see the value of his home decline to $345,000 or so when his taxes hit $8,400 per year.
Only time will tell, but my feeling is that the real estate market is going to collapse unless mortgage rates decline enough to make up for these large property tax increases.
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