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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: TigerPaw who wrote (11565)	1/10/2003 7:29:47 PM
From: stockman_scott	Respond to of 89467

A shot in the arm or in the foot? The Japan Times Jan. 10, 2003 URL: japantimes.co.jp The economic package unveiled by U.S. President George W. Bush on Tuesday, coming on top of a huge tax cut announced last summer, is proof that the Bush administration is determined to revive the U.S. economy, which is still ailing from the collapse of a stock-market bubble. The stimulus plan is also good news for the stagnating world economy. As things stand, though, it is unclear whether the plan will show its intended effect. The 10-year $674 billion package aims, among other things, to eliminate all taxes on corporate dividends paid to shareholders and speed up scheduled reductions in income tax rates. With the Bush administration preparing to attack Iraq, it is difficult not to regard these and other stimulus measures as a preemptive move designed to minimize the economic fallout if war breaks out. Prospects for the U.S. economy, the main engine for global growth, are of acute concern, particularly to Japan and other countries that depend on the huge U.S. market for exports. The Japanese economy, the second largest in the world, now appears to be sliding back into recession. However, Japan will be gambling if it takes a U.S. recovery for granted. Wall Street on Tuesday showed a lackluster reaction to the tax relief plan -- as if to support the view that its effect on U.S. growth may be limited. The fact is that the U.S. economy is suffering a deflationary blow from the bursting of its bubble, much as the Japanese economy has been deflated. It is estimated that total asset value in the United States has shrunk by $6 trillion, a sum equal to about 60 percent of its gross national product. If Japan's experience is any guide, it will take a long time before the U.S. can recover fully from its postbubble slump. The Bush administration, which recently installed a new economics team, seems to have another compelling reason to stimulate the economy: President George W. Bush faces re-election in 2004. It is easy to imagine that Bush wants to avoid the "mistake" made by his father, former President George H.W. Bush, who won the 1991 Persian Gulf War but lost his re-election bid because of domestic economic problems. Two pillars support the latest package aimed at achieving an economic recovery: First, stimulating consumer spending, which accounts for 70 percent of the GDP, and luring investors back into the stock market. The job situation -- a major factor affecting consumer confidence -- holds the key. At the moment, though, employment in the nonfarm sector remains depressed as companies continue to lay off workers to cut payroll costs. Second, abolishing dividend taxes. This is not likely to provide much help to the economy, either, because investors seeking capital gains are probably not as interested in a tax incentive. Nor is it likely that making dividends tax-free will really help to bring overseas funds back into the U.S. stock market, although it will eliminate a form of double taxation. Another concern about the tax-cut plan is that it may inflate the already bulging budget deficit. The administration's goal of bringing back a budget surplus in fiscal 2005 now looks like a pipe dream. With the current account deficit reaching $500 billion a year, the nightmare of "twin deficits" is coming back to haunt the U.S. economy. As a result, international confidence in the U.S. dollar will likely diminish, notwithstanding the Bush administration's pledge to keep it strong. It is true that housing investment remains firm thanks to successive interest rate cuts by the Federal Reserve. The downside is that home prices are rising faster than worker incomes. If the trend continues, the boom in this key sector will probably fizzle out. With little room left for further monetary and fiscal action, the Bush administration's economic policy may come to a dead end -- something the Japanese government has experienced in recent years. In this context, U.S. calls for a drastic monetary easing in Japan are worrying. Reportedly administration and Federal Reserve officials want to see the Bank of Japan purchase not only new government bonds but also stocks and land. In theory, such moves may provide an interesting case study of an antideflation exercise, but in practice they represent an experiment too dangerous to try. With regard to a war with Iraq, if it occurs, at the very least a temporary economic slowdown will be unavoidable. However, it would be optimistic to think that once the hostilities ended, economic conditions would lead to a robust recovery in due course. It seems more likely that the depressing impact of war would linger longer than expected. The "spillover" effect of the Persian Gulf War, it should be remembered, was not great enough to turn the U.S. economy around. The Japan Times: Jan. 10, 2003 (C) All rights reserved japantimes.co.jp