The Entrepreneurial View #453
What Should Policymakers Be Doing to Help the Slowing Economy?
by Raymond J. Keating
The word on the economy seems to be "slowing." Two questions come to mind. First, how slow will it go? Second, can policy changes make a difference?
On October 1, the Institute for Supply Management survey of purchasing managers at factories noted that strength in the U.S. factory sector fell in September. That was the third monthly decline in a row, with the latest number hitting the lowest level in six months.
But the factory index still remained in positive territory. A reading above 50% means that manufacturing is still expanding. September's reading was 52%.
Two days later, the ISM's measure of strength in the non-manufacturing sector told much the same story. September's 54.8% was the slowest since March. But again, anything above 50% means expansion in the service sector.
In each case, the indicators point to continued, but slowing growth.
But there are other important numbers to consider as well. On September 26, the Commerce Department reported that orders for capital equipment dropped in August by 4.9%, indicating a slowdown in business investment.
Meanwhile, data out late last week from Commerce made clear that spending on residential construction continued its long decline, with outlays in August down by 16.5% from a year earlier. August's decline marked the 18th straight monthly drop. But nonresidential construction spending rose in August, and was up by 15.2% compared to last year.
But what about consumers? Isn't the consumer key to all of the economy?
Well, it is critical to keep in mind that it is not usually the consumer that leads the U.S. into recession. Instead, it generally is a fall off in private sector investment. In fact, during nine periods of recession over the past six decades, seven initially and primarily featured a drop in real gross private domestic investment. Consumer spending often follows the economy into recession, or even manages to keep growing despite recession, as occurred in the 1969-70 and 2000-2001 downturns.
Can our policymakers make a difference in this worrisome economic picture? Absolutely.
Most critically, they can remove uncertainty that has a negative effect on business, investment and the economy. For example, making the key pro-growth aspects of the 2001 and 2003 tax relief measures permanent would be an excellent start, including lower personal income, capital gains and dividend tax rates, expanded small business expensing for capital expenditures, and terminating the estate, or death, tax.
For good measure, the moratorium on Internet access and multiple and discriminatory taxes on e-commerce is due to expire on November 1. That also should be made permanent.
Also, other costly ideas that are being kicked around Congress - like jacking up taxes on energy investments - must be tossed aside.
In addition, businesses understand that we are in a global economy. Unfortunately, the way Congress has been acting on the trade front - that is, failing to extend trade promotion authority for the President, and not moving on various trade deals - it is not clear if they grasp this economic fact of life.
Investors and businesses obviously do not like uncertainty, especially when it comes to the distinct possibility that taxes could go much higher, or trade barriers will persist or even be expanded.
Of course, our elected officials could get even more proactive. For example, reducing the U.S. corporate income tax rate, which ranks among the highest among developed nations, makes sense. Getting rid of both the individual and corporate alternative minimum taxes would reduce tax complexity and costs, while strengthening various pro-investment aspects of the tax code. In addition, full expensing of capital expenditures should be an option for all businesses.
The corporate capital gains tax also should at least be reduced to the same level as individuals pay, which is 15%.
In fact, if we are serious about boosting entrepreneurship and investment, job creation and economic growth in the U.S., then capital gains taxes for both individuals and corporations should be eliminated altogether. Such a bold step would make the U.S. a global magnet for capital, and keep in mind that labor is powerless without capital.
Are any of these pro-growth measures likely to become reality in the current Congress? Unfortunately, it is unlikely, and the economy will pay a price. But we are in the midst of a presidential election season, and these are the issues that candidates should be talking about if they are serious about helping the economy.
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
This article may be reprinted with appropriate citation and credit.
