May 11, 2004

OECD Economic Outlook
Posted by Jon Henke

I've perused the OECD report I mentioned here, and thought I'd share with you some interesting excerpts. (pdf)

With the slump of business investment now well over, the world economy is experiencing a strong and sustainable recovery.
That slump in business investment hit the United States particularly hard, as our C&I loans dropped to "less than half the $141.2 billion loaned during the same week in August five years ago". As Bruce Bartlett put it...
To put the loss of credit into perspective, between July 1990 and December 1991, C&I loans fell by 3.5% — a period of an acknowledged credit crunch. Over a comparable 18 month period between March 2001 and August 2002, such loans have fallen by 10.3%. In other words, credit is three-times tighter in the current recession and recovery than during an equivalent time period during the last economic downturn.
Now, that can be explained in a variety of ways, but most of them come back to this: years of malinvestments finally came to a head, which made the banking industry less tolerant of risk. So, while rates were extremely low, banks simply didn't want to put their money at risk without the prospect of more substantial profits.

Which, come to think of it, made that a pretty good time for a supply-side tax cut. After all, if the economic problem was reduced business spending - and it was - and businesses weren't spending because they couldn't get their hands on enough capital, well.....

Anyway, the OECD report goes on...

Asia remains buoyant, with China close to overheating and Japan enjoying a much stronger and broader recovery than expected. In the United States, the economy has already been growing well above potential and other English-speaking countries, which took part only marginally in the past slowdown, are cruising ahead. [emphasis added]
"Above potential". Put that in your pipe and smoke it, Krugman. As for John Kerry, he can puff on this....
Despite lingering worries, it seems likely that, in the United States, labour too will share in the recovery. With business profitability now well restored and employment at last picking up, real wages and labour income should accelerate markedly, thus providing a stronger underpinning to the recovery.
And the Dick Gephardt's of the world should pay close attention to this...
As the spectre of a persistently jobless recovery recedes, controversies about the negative role of job offshoring should subside and take a less emotional turn.
Actually, I'd suggest that controversy will fade just about the time we finish our Presidential elections. Make of that what you will.

As for Bush, here's his warning...

In the United States, there is indeed a risk of macroeconomic policies -- especially on the fiscal side -- remaining expansionary for too long into the recovery, thus triggering an abrupt back-up in long-term interest rates, with negative consequences for investment world-wide.
Though they seem to always forget it, an intrinsic part of this counter-cyclical tax policy that the Bush Administration implemented is this: while you lower tax rates to encourage economic growth....those tax rates don't stay lowered forever.

Now, I'm not suggesting we raise taxes. But such an expansionary fiscal and monetary policy cannot be sustained indefinitely.

Much more interesting material in the OECD report. I'll have to come back to it in a later post.

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Comments

OK, I am confused. If you're suggesting that taxes be raised, what are you suggesting? That it'll be fine to just let the tax cuts expire? I have a hard time backing this up but I disagree. I think we haven't reached our low point in tax rates where growth will continue world wide without any negative consequences. Tell me why I'm wrong.

Posted by: Allen Speir at May 11, 2004 02:37 PM

I'm not necessarily suggesting that we raise taxes. Just pointing out that "raise taxes during a boom" is a part of the counter-cyclical economic theory that the Bush administration cited as justification.

So, are we below the equilibrium point on the Laffer Curve? Evidence from the tax hike in the 90s suggests we are not.

Posted by: Jon Henke at May 12, 2004 07:39 AM