An Economic Reality Check
Anyone who found the stock market irrational during the dot-com frenzy should look at it now. A flush of optimistic military reports from Iraq can drive up stocks, even in the face of bad news about the economy. The Dow Jones industrial average rose Friday and again Monday as U.S. tanks probed Baghdad. What investors ought to be watching instead of cable TV is everything from employment figures to the federal budget.
The unemployment rate remained at 5.8% in March, according to Labor Department reports released Friday. Companies cut 108,000 jobs, on top of 357,000 positions in February. The number of people who have stopped looking for work increased to 474,000 in March, up from 450,000 in February. Once a person stops looking for work, he or she is no longer counted as unemployed. Since President Bush took office, the economy has shed more than 2 million jobs, with 600,000 of those losses occurring since November.
Commerce Department statistics show that factory orders fell 1.5% in February.
Foreign markets aren’t going to bail out the American economy -- growth in Europe and Japan has stopped almost completely. Even the fall in the value of the dollar, which makes American exports cheaper, has barely put a dent in a trade deficit of more than $40 billion a month.
The administration’s proposed new tax cuts, in addition to substantial cuts passed in 2001, would go straight to the bottom line, which is already headed for deficits in the hundreds of billions of dollars. The final costs of war and reconstruction in Iraq are yet to be known and are not included in the deficit figures. The tax cuts themselves primarily benefit the well-off; economists say they will not give a quick boost to the overall economy.
The White House appears ready to compromise in Congress on a tax cut smaller than President Bush’s $725-billion proposal. But the deficits created by additional tax cuts of even half that size would inevitably push the Federal Reserve to raise interest rates so the Treasury could attract funds. This would draw off investment capital needed by U.S. firms and make it costly for consumers and businesses to borrow.
Stock traders may be swept up in anticipation of a Baghdad takeover, but lawmakers need cooler heads. Moderate Republicans like Sen. Olympia J. Snowe (R-Maine) have been holding out for new tax cuts of $350 billion, half of what Bush asked. Zero would be better, if politically unlikely. A quick end to war could give the economy a shove. Only fiscal sanity can keep it humming.
