Now that he's axed the heads of the SEC, the economic council, and Treasury, President Bush has a rare opportunity to redefine economic policy -- and not a moment too soon. Just as his international team developed the preemption doctrine in stark contrast to containment and deterrence, Bush's new domestic team can break with the past and get the U.S. economy growing again in a way that will allow all Americans to benefit.
But first, the administration has to admit that there are problems in the economy, something that Paul O'Neill, the brittle but sunshiney Treasury secretary, refused to do but his replacement, John Snow, a more suave exec, can do with élan. And the administration has to recognize that simply cutting taxes for the wealthiest isn't a policy at all. It's just a statement that says the rich should have it even easier and cushier than we do now. I say that as someone who stands to make a couple hundred thousand dollars pronto if the Bushies accelerate the current tax cuts and make them permanent. As much as I like money, there are a lot of more productive and fairer ways to tinker with the tax system.
More important, it won't work. Making the rich richer won't address the fundamental weaknesses of the economy, because the economy's problems have nothing to do with inadequate consumption by the wealthy. They have to do with too much capacity and not enough demand on the corporate side. Or to put it in the language of the stock market, the housing, auto, and retail-sales markets -- all of which would be goosed by cutting the taxes of the wealthy -- are already operating at full tilt. If you look at home prices, for instance, you could argue that they are operating in overdrive. Simply making the rich richer would amount to turning the oven from 500 degrees to 600 degrees, effectively burning what's broiling already.
I don't know if the tax cutters truly don't understand that they are simply overstimulating the hottest part of the economy or if they're just out to starve the government -- make it smaller and less effective -- because they fundamentally distrust government.
Regardless, it's just plain stupid to focus on the take-home pay of those who make $300,000 or more when we are trying to get companies to build and reinvest, not individuals. For that, we have to ask, How did we get to the point where corporations are so strapped, anyway? The simple answer is debt: Companies took on too much debt and built too much capacity without having the ability to pay for it.
To get back on track, any new economic team has to break with tradition and recognize that we need intervention, positive intervention, from the government, because the weak portion of the corporate side right now is incapable of stimulating itself.
First, the team has to radically change the tax code so it favors equity over debt. Right now, companies can deduct interest from earnings, but they can't deduct dividends. So what companies do is borrow money like mad and buy back stock to prop up their stocks so the executives can exercise and sell the options they've been given. You couldn't come up with a stupider way to reward dumb behavior and accentuate the difference between the executives and the rank and file if you tried.
What should happen? We should eliminate the deduction for interest for corporations and let them deduct the dividends they pay out. Then they would create long-term income streams that would make the stock market a simple, more rational place for investors. We would all be in the hunt for stocks that pay the most dividends, and we would want to become long-term shareholders of those enterprises. If we went a step further and eliminated the tax on dividends at the individual level, buying stock would become the best tax-advantaged way to get rich. We would also be, by nature, much less suspicious of equities -- a quick way to restore investor trust -- because dividends don't lie. If companies don't make any money, they can't pay dividends. If they stumble, they can cut the dividend. Right now, if they stumble, they have to file for bankruptcy because they can't cut out interest payments without surrendering to the lenders.
Second, we have to have an economic team that's less willing to leave things to fate. For example, why does United Airlines not get a loan even though we have set up an entity to bail out airlines, but WorldCom gets tons of government business even though it committed the worst financial fraud in U.S. history? Why do we allow WorldCom to be fast-tracked out of bankruptcy with no debt even as we close Arthur Andersen because its Houston office shredded documents? Why do we allow a new WorldCom to be able to compete debt-free against honest players like Verizon, or SBC or AT&T, when we doom UAL to liquidation?
Believe it or not, these are Treasury Department decisions. There is a reason why people respected Bob Rubin, and it isn't just because Wall Street "understood" him. Rubin and his team, including his successor, Larry Summers, actually thought about and debated these kinds of issues because they knew that "the marketplace" often reaches illogical if not downright unfair conclusions.
Third, we need to recognize that we have to allow our battered tech and telco sectors, with their massive unused capacity, to help out with homeland security. We have tons of companies and people that don't have enough business but could develop a national law-enforcement data link, and protect us from terrorists that are now surely slipping through the cracks, but they aren't being engaged because the federal government doesn't understand how to harness these troubled industries. Again, that's a Treasury issue.
Understand, it is not as simple as finding someone who speaks genuine Wall Street gibberish, something that Snow badly needs to take a crash course in. Nor is it as easy as getting some graybeard who can negotiate with the investment banks as the presidential economic adviser.
What we need is a vision, an acceptance that things aren't working as they should be working, and a recognition that it is the corporate balance sheet, not the individual's balance sheet, that needs help. Only then will the economy return to the 5 to 6 percent growth that we know is possible without igniting inflation.
Don't just cut taxes and hope for growth; fix the corporate balance sheets and watch the economy grow on its own!