Michael Brandl > Macro Updates > Archives > March 19, 2003

April 16, 2003 

And now...back to the economy. With the war in Iraq reaching its final stages (we hope), attention is turning back to the struggling American economy. A great deal of the discussion seems to be centered upon the Administration's Jobs and Growth Proposal. Here is a breakdown of what each side is saying:

Cons (from the Economic Policy Institute): 

• The Administration's policy would destroy 750,000 jobs at a cost of $675 billion, while increasing income inequality, and "wasting resources."
• The EPI states that the majority of the benefit from the Administration's plan would go to the wealthiest 1% of the U.S. population.
• The EPI President, Lawrence Mishel suggests "Spending is more simulative than tax cuts" and that temporary tax cuts and spending increases are needed, while the Administration's "permanent increases (are) unnecessary."
• The EPI suggests as an alternative $110 billion in spending on grants to states for education, health, law enforcement, as well as extended unemployment benefit. This along with a temporary tax cut aimed at low wage earners would be more beneficial for the economy, the EPI argues.

Pros (from various Administration sources):

• The Administration's proposal would create 1.4 million jobs in the next 18 months.
• The plan would stimulate the economy by reducing the cost of capital and thus spur investment and consumption spending.
• The plan would provide $3.6 billion in re-employment accounts to help add flexibility to American labor markets.
• Tax revenues to the states would increase as the economy grows and expands.
• 92 million Americans, on average, would receive a tax cut of $1,083 in 2003-real money to help pay the bills and push the economy forward.
• 26 million taxpayers would receive an average tax cut of $704 this year as a result of ending the double tax on dividends. America's seniors, who receive half of all dividend income and depend on it for their retirement, would especially benefit.
• The more than 50% of American households who own stock will benefit from a boost to the stock market as a result of ending the double tax on dividends. Investment expert Charles Schwab estimates the stock market would rise 10 to 15 percent just in the short term. 
• All working families will benefit as businesses expand, create jobs, and raise workers' wages.

So, who is right? I will let you decide. See my thoughts near the bottom of the page at: <http://www.whitehouse.gov/ecom/ecomquotes.html>. The final package will probably be somewhere in between. The House has passed a $550 billion package, while the Senate version is at $350 billion.

Finally, A Regulator Gets in Right. Hats off to Don Powell and his staff at the FDIC. Last month they held a conference on looking at updating the regulatory structure of the American banking system. Far too often in the past changes in the regulation of financial markets have happened during crisis. These changes in regulation were not well thought and as a result they often created more problems than they solved. This time around however Powell is doing it right. He realizes that regulations may not be keeping up with rapid changes in financial markets. It is time to fix things before they get "too broken." Major changes in financial market regulation maybe around the corner. Keep an eye on this. Hopefully these changes will ensure the safety, soundness, and efficiency of our financial markets. When that happens, Don Powell, and people like him, will be the ones we will owe a great deal of thanks. 

Europe Watching. There are some growing concerns about the European economy (by "Europe" I mean the economies that belong to the Euro). One thing to keep an eye on is M3 growth in Europe. In February 2003 the annualized growth rate of M3 was 8.1% up from 7.3% in January. One could argue that the growth rate should be closer to 5 to 5.5%. The European Central Bank blames the run-up in M3 on the geo-political uncertainty, explaining that this has lead to a greater holding of the safe and liquid assets that make-up M3. Okay, but it may bear watching. Keep an eye on that M3 growth now that political uncertainties might be waning.

Europe has other concerns other than its monetary aggregates. Structural reforms in its labor markets, product markets, and public finances have yet to be undertaken. It seems everyone agrees that these reforms need to be undertaken, but, as the saying goes, "talk is cheap." If the Europeans are serious about economic growth they have to "bit the bullet" and undertake these, admittedly politically unpopular, reforms. Without them, Europe will continue down its current path of anemic economic growth. Both Wim Duisenberg and Jean-Claude Trichet have expressed hope that the end of the war in Iraq will help restore consumer and business confidence in Europe and thus stimulate the economy. Maybe. Maybe not if the structural reforms are put off even longer.