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If fiscal policy is to be used for short-term stimulus, then it must be far more aggressive. The surplus is expected to be $281 billion for fiscal 2001. A tax rebate of half that amount, retroactive to the first of the year and starting immediately, would have some sort of impact.
But such measures are diversionary and even counter-productive. Far more important for the long-term strength of the economy would be comprehensive relief in the form of reductions of marginal tax rates, across all brackets, as President Bush has proposed. Even if these reductions took place over time, they would immediately signal an important change to investors and consumers and would likely lead to more savings and investment and perhaps consumption as well. Also, in substance, cutting rates would spur entrepreneurship and investment by lowering the marginal cost of those activities.
A tax cut is the only sensible way to reduce the mounting surpluses, which will create a crisis of another sort by the year 2006, when the Congressional Budget Office forecasts that the federal government will accumulate $3 trillion in "uncommitted funds" -- money that can't be used to pay down the debt because there will be no debt to pay down. Greenspan worries that these funds will be used to purchase private-company stocks and bonds -- thus making the government a major player in the private markets and in corporate governance. Or the $3 trillion could, of course, be spent -- since, judging from the budgets of the past two years, surpluses have loosened constraints on Congress and the White House.
Surpluses, in fact, are dangerous in times like these. My colleague at the American Enterprise Institute, the economist Kevin Hassett, pointed out in testimony Feb. 13 before the Ways and Means Committee that "the last time we approached a slowdown with restrictive fiscal policy, the economy responded to high surpluses and a general weakening in consumer demand by posting the steepest decline in real GDP in postwar history, dropping a whopping 10.3 percent (annual rate) in the first quarter of 1958. At the time, the surplus was about 1 percent of GDP." Currently, it is forecast to be three times as high.
Regulatory Reform to Spur High-Tech Supply
But resuscitation will require more than interest-rate cuts and tax-rate cuts -- though they are absolutely necessary. It will require regulatory changes that liberate supply once again. Specifically, these steps should be taken:
The U.S. needs to formulate a clear energy policy that concentrates on encouraging supply. Currently, supply is being severely hampered by excessive environmental barriers to increased exploration for energy and by policies, such as "new source review," that discourage the renovation of old refineries and utility plants and the building of new ones. We have neglected supply for ten years and are just now beginning to suffer the consequences. High technology requires energy, but supply constraints are putting the supply of energy in jeopardy. I recently returned from California, the heart of the nation's high-tech economy, where rolling blackouts are wreaking havoc with production. The rest of the nation may follow this summer.
The antitrust policy of the later years of the Clinton Administration should be changed to take into account the realities of high technology. I am referring especially to two phenomena: that monopolies and near-monopolies tend to be short-lived since barriers to entry for competitors are low and information about new software and other innovations spreads quickly, and that high-tech monopolists and near-monopolists, with low (often no) marginal costs, have an incentive to increase production rather than restrict it, as monopolists of the past did. The antitrust suit against Microsoft was the seminal event that changed the relationship between government and high technology and frightened investors. The decision by the Justice Department to go after a breakup of Microsoft coincided almost precisely with the peak of the Nasdaq and the beginning of its decline of nearly two-thirds in value. As George Bittlingmayer recently concluded after a historical study in a paper titled "Regulatory Uncertainty and Investment: Evidence From Antitrust Enforcement" in The Cato Journal (vol. 20, no. 3): "The low investment of the late 1950s and early 1960s was due at least in part to a resurgence of aggressive antitrust and related initiatives interpretable as 'anti-business.' Some of the low investment of the 1970s may have had a similar origin." Much the same is happening now to the high-tech sector. Congress and the new administration have a chance to return to the course of the 1980s and most of the 1990s.
The bottlenecks that are restricting the spread of broadband technology must be forced open. The main problem is the lack of enforcement of the main piece of deregulatory legislation, the Telecommunications Act of 1996, which required the Bell monopolies to open up their systems to local competition as a condition for being allowed into long distance. But so far, after five years, in only four states have the Bells opened up enough to qualify. Meanwhile, mergers have produced a re-monopolization -- the eight regional monopolies that control 95 percent of the local telephone business (the "last mile") are now just four. Because the Bells won't cooperate in opening their networks (preferring to use the courts and politicians to foster delays), competitors called CLECs, or competitive local exchange carriers, are cutting back their service or are going bankrupt. Rates for consumers are high -- the opposite of the condition that prevails in competitive long distance. It's not a pretty picture. To bust the bottleneck, the Telecom Act must be taken seriously and, at the same time, state public utilities commissions should be encouraged to force "structural separation" on the Bells, requiring them to split into independent wholesale and retail units, so that competitors will get a fair shake. It sounds technical but it is the only answer to liberating telecommunications supply, allowing interactive businesses (many of which are now going under for lack of broadband) to prosper, and spreading the benefits of fast Internet connections to consumers.
Wireless, too, is being hurt by a lack of supply. Regulators should get out of the business of allocating bandwidth to the politically powerful and instead let market forces determine who gets space on the spectrum. Congress should auction the spectrum that it gave for free to the TV broadcasters in return for a promise -- unlikely to be met -- of a timely buildout of digital, high-definition television. And the Defense Department must stop hogging bandwidth. The Federal Communications Commission has been sitting on loads of spectrum in the 700-megahertz frequency band. Liberate it.
These four simple changes are for starters. Clearly, the federal Air Traffic Control system is another constraint on supply -- in this case, the supply of fast consumer and freight transportation -- that needs to be eliminated and replaced by a private, market-oriented ATC, with government oversight for safety only. Occupational regulations reduce output by raising costs for businesses. All such rules must be reviewed verify that their benefits exceed their costs. And state governments must reduce the threats -- especially to technology and energy -- inherent in the collusion between state attorneys general and trial lawyers, especially those hired on a contingency basis.
The U.S. economy has shown that, when supply is liberated, growth rates of 4 or 5 percent -- roughly double the post-World War II average -- are possible, without inflation. With tax cuts, interest-rate cuts, a supply-oriented energy policy and sensible regulations, we can revive a prosperity that will improve the lives of even more Americans than the boom of the 1980s and 1990s.