An Economy of Logic
One theme that our Prez loves when talking about the economy is how giving small businesses a tax break will help lift us out of recession. It’s the familiar supply-side rhetoric: businesses will use the tax savings for investment in new people or equipment, thereby creating jobs and demand. As a small-business owner myself, let me respond to a few of these points.
Although I am generally skeptical of supply-side as an economic theory, I must admit that it can work as intended if deployed during a phase of the business cycle when demand is high and credit is tight – that is, if businesses have pent-up demand for capital but can’t get it for one reason or another. In that case, business will indeed use tax cuts productively, pushing an economy on the brink of a downturn into healthier growth.
Right now, however, we have exactly the opposite problem. Credit is as easy as it can possibly be. Hardly a day goes by without a few offers of zero-interest credit cards, absurdly low home equity refinance rates, or lines of credit for my business. I just got my annual dose of grim news from my tax preparer, but the taxes I owe are a result of having had a good 2002 following a bad 2001, not of excessive rates.
The problem is demand. Business is slow, so even if I got a break on taxes, I would not necessarily invest in anything right now. Maybe I’m more risk-averse than most, but it doesn’t strike me as sound business strategy to spend money when return on investment is so uncertain. The only place I’d feel comfortable investing right now is in marketing – hardly a capital-intensive area for most small businesses. And again, if all my clients are broke, I’d just be tossing pebbles into a stagnant pond.
This economy needs several things from the government before it needs a tax cut. First, some stability. The market hates, Hates, HATES all this talk of war. It creates basic uncertainty about just about everything from public safety to energy costs. Likewise, the Administration’s reckless attitude toward budget deficits might escape critical notice among the public at large, but professionals understand what it will do to the long-term health of the economy and this is having a distinctly negative impact in capital markets.
Second, it needs honesty. Trust is at an all-time low, and the Bush team seems to lack the commitment to tackle corporate crime with even a fraction of the zeal with which they go after growers of medicinal marijuana.
Third, it needs regulation. Yes, Virginia, even free markets need an active, vigilant government to prevent the feeding frenzy of capitalist sharks from doing too much damage to the environment, labor and safety standards, and the ecosystem of open competition. Capitalism unchecked tends toward monopoly – that’s an economic fact. Without sufficient oversight, free markets can and do become conspiracies by large corporations and cartels against the public interest. It’s in no one’s interests – not even the monopolists’ – to let that happen. One of our very best Republican presidents – Teddy Roosevelt – understood this. I somehow doubt GWB shares his convictions.
Fourth, and deliberately last, it needs stimulus. This isn’t the 1930s, or the 1960s, or even the 1980s anymore. An activist government fiscal policy, whether through tax cuts or spending, is in my view a less effective tool to stimulate economic growth than a responsible government fiscal policy combined with an activist monetary policy. That’s the combination that gave us the 1990s boom, the longest sustained stretch of economic growth in American history. Give Greenspan the credit if you don’t like Clinton – it doesn’t really matter. Experience shows this is what works in today’s global economic environment, and stimulus of any sort should be used only as a last resort.
While Bush and the Republicans have redefined conservatism as this volatile mixture of foreign policy adventurism and economic irresponsibility, the business community remains conservative in the original sense of being skeptical of radical change. We are rapidly approaching the point when those whose interests are served by genuine conservatism will realize that they do not have a friend in this Administration. And then it will be very interesting to see where they turn.
5:27:50 PM 
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