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SEA ISLE, N.J. – As one season folds into another at the beach, the news is good and bad. On the upside, the renters and kids are gone, the dogs are more free to run in the surf without getting ticketed, the Lima Bean Festival is coming, no one in town was swallowed by a shark and there was no line this week for lunch at the Crab Trap.
“I’m so glad they’re gone,” said the bartender at lunch yesterday, referring to the grand exodus of the summer crowd on Labor Day. “I especially won’t miss the kids. All summer, adults would go to their tables and leave their kids, 7- and 10-year-olds, at the bar to play, to toss stirrers around and play in the bar mix, like I don’t need these seats for dinner customers.” That’s end-of-season frustration talking, fatigue and aggravation, after what amounts to 100 Saturday nights in a row.
It was the same with the all-night cashier at the 7-11 on the night before Labor Day. “I can’t wait ’til tomorrow,” she said, looking pale and exhausted and dragging on a cigarette as she rang up my caf? mocha. “They all get out of here tomorrow. Starting Tuesday, this town’s nothing, zilch.”
Among a group of beach house owners in town for the weekend, the talk was more about money and the economy, about their record losses in the stock market and the record gains in the value of their beach properties, and about Alan Greenspan’s comments on stocks and houses at the Fed’s annual retreat in Jackson Hole, Wyo., over the Labor Day weekend.
Bottom line, Greenspan said it was tough to understand how the changing values of stocks and homes affect consumer spending and the overall economy: “To answer these questions, we need far more information than we currently possess about the nature and the sources of capital gains and the interaction of these gains with credit markets and consumer behavior.”
In fact, the linkages aren’t difficult to comprehend. We don’t, for instance, need “far more information” to see how increases in the value of stock and homes produce higher levels of consumer confidence, elevated levels of consumer spending and accelerated growth in the overall economy. Simply stated, the relationship between the value of stocks and homes and the level of consumer spending and total economic activity is direct and positive.
Looking back, it’s too bad that Greenspan wasn’t as cautious in the recent past as he seems today, too bad he didn’t seek “far more information,” for instance, about the links between stock values and the overall health of the economy before he made his famed “irrational exuberance” speech on Dec. 6, 1996, and too bad he didn’t dig for “far more information” before he tried to prick the bubble of the rising U.S. stock market by jacking up interest rates in 1999 and 2000 while the economy was heading straight into a recession.
All told, by fighting an inflation that didn’t exist, Greenspan enacted an ill-timed policy of raising interest rates after the economy had begun to fall. The effect was to turn an investment boom into a bust and cut consumer purchases of big-ticket items like homes and automobiles. The price of the error? Very expensive – a stalled economy, a collapsing stock market, and an overall drop of some $7 trillion in wealth over the past 12 months.
The way out of the woods? It’s not enough, clearly, that the Fed has been working energetically to undo the damage it produced, cutting interest rates seven times since January. Compared to last year, total economic activity in this year’s second quarter expanded by only 1.2 percent, the weakest performance since the first quarter of 1993.
And it’s not enough to blame Bush. CNBC economics commentator Lawrence Kudlow explains how we got here: “What Bush inherited from Clinton was a big economic turkey: the worst bear-market decline in 2.5 decades and the first synchronous global slump since the mid-1970s. Before Bush was even sworn into office, the Nasdaq technology index had already plunged 70 percent. By the time Bush had submitted his tax-cutting budget, the U.S. economy had rolled over to less than 1 percent growth from 8 percent in late 1999. And before the tax cuts were even passed into law, the domestic private-sector economy (excluding government spending and trade) had shrunk two consecutive quarters.”
The right medicine? “The economy,” says Investor’s Business Daily, “can’t perform at its peak when spending, saving and investing are shackled – by law.” The unshackling will require growth oriented tax cuts to encourage investment and boost productivity, especially a capital-gains reduction, genuine death-tax repeal, accelerated depreciation allowances and overall lower business taxes. Longer run, it also means regulatory improvements and tort reform in order to reduce the flow of capital and human resources from productive to nonproductive sectors.
And to boost consumer spending, the largest component of the economy, what’s called for is a speed up in the tax cuts (most are back-ended at the end of the 10-year deal), plus further interest rate cuts to stimulate large-ticket purchases.
Overall, what’ll work is more individual freedom, more incentives, lower taxes and less central control.