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The Economy Is on the Move -- Downward

A tax break will help if it goes to the workers, not the wealthy.

May 01, 2003|Robert B. Reich | Robert B. Reich, secretary of Labor in the Clinton administration, is a professor of social and economic policy at Brandeis University.

Listen to Wall Street analysts and you'd think the American economy was on the rebound. Yes, profits are up a bit for the first quarter and companies are beating earnings expectations. But profits and earnings are up because companies are cutting jobs.

Listen to Main Street and you hear a different and truer story about the economy: It's going nowhere. Data released Friday show almost no growth during the first quarter of the year. Other reports show almost half a million jobs disappeared just in January and February.

The official unemployment rate -- 5.8% -- doesn't even tell us about the number of Americans who have simply left the labor force. To be counted as unemployed you've got to be actively looking for a job. But over the last two years, a lot of people have stopped bothering; the portion of American adults who are working or actively looking for work fell 0.9% to 66.2%. That's the largest drop in almost 40 years. More than 74.5 million adults are not working -- up more than 4 million since March 2001. The average amount of time out of work has been rising too. Two years ago it was 13 weeks. Now it's 18 weeks.

In other words, the job picture is simply awful. Corporate profits and earnings are rising because companies are becoming more aggressive about cutting their costs. Payrolls are their biggest single cost, so they've been slashing jobs.

But corporate profits and earnings can't go on rising if there aren't enough consumers to buy the goods and services that companies produce. Ultimately, Wall Street depends on people spending their paychecks. If more and more people lose their jobs or drop out of the labor force altogether or are worried about losing a job, Americans will hold back spending.

So far, people are continuing to spend despite the awful job picture because mortgage interest rates have dropped so low that homeowners have been able to refinance and get their hands on a lot of cash. We're talking real money here: Homeowners raised $130 billion through home-equity loans last year, nearly double the amount in 2001. But the borrowing binge will soon reach its natural limit.

Companies are also buyers. They buy equipment, supplies and raw materials. But companies have stopped buying because they're worried they won't have enough customers. Between January and March, business purchases of these sorts of capital goods dropped -- the ninth drop out of 10 quarters.

The White House says businesses need investment tax breaks, but that's nonsense. Interest rates are so low that businesses could easily afford more capital goods if they wanted them. But they won't buy more until they know there's a healthy market for what they produce.

Government is also a purchaser, and government spending is way up. The federal government's extra spending on the military has more than made up for state government cutbacks. Problem is, it's not nearly enough to get a $10-trillion economy moving again. And deficit hawks correctly worry about the long-term effects of large and seemingly endless federal deficits. The boomers' Social Security and Medicare bills will start coming due within the decade. That's one reason why Bush's whopping 10-year tax cut is dangerous. So how do we get out of this quagmire? Not by giving rich people bigger tax breaks, as Bush wants to do. Rich people won't spend any extra money they get. They already spend what they want to spend. That's the definition of being rich. Don't just take my word for it. Both Alan Greenspan and the Congressional Budget Office agree that the Bush tax plan won't stimulate the economy.

The best and the fastest way to get more money into the pockets of people who are likely to spend it quickly is to cut the taxes of average working people. Most people pay more in payroll taxes -- primarily for Social Security and Medicare -- than they do in income taxes. So a temporary cut in payroll taxes -- say, by exempting the first $15,000 of income from payroll taxes -- would put an extra $1,200 into most working people's wallets this year alone. And because businesses wouldn't have to pay their portion of that payroll tax, they'd be encouraged to keep more workers on the payroll.

Purists will complain I'm endangering Social Security because that's where most payroll taxes go. But they don't understand (or won't admit) that the Social Security trust fund is nothing more than an accounting device, and Social Security is a pay-as-you-go system.

The best way to make sure Social Security is there for boomers is to get this economy moving again, as quickly as possible. That's also the best way to get more Americans working. The Bush tax plan won't do it.

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