The campaign season is upon us, and to judge from the debate so far, most of the Presidential candidates, as well as the incumbent himself, are entirely too sanguine about the economy. Voters, buoyed by a tight job market and high stock prices, rank the health of the economy fifth among top issues, far behind Social Security, health care, education, and taxes. So politicians are taking economic growth for granted, too. They shouldn't.
There were many surprises in the early and middle years of the current business expansion, and as it approaches its record ninth year and begins to show its age, there are certain to be surprises as well. A slowdown in technology investment, a sharp fall in the stock market, a foreign currency crisis, or any number of unforeseen things could shake the foundation of the current expansion, which is powered by high-tech spending and globalization. Politicians should be discussing how to maintain the momentum of growth and prosperity, not assuming that they will continue indefinitely.
What are the government policies needed to maintain current prosperity? Husbanding the budget surplus at a time of high consumer spending makes sense. There will certainly come a time when the business cycle turns down, and that decline could be vicious. The high-tech sector now accounts for a quarter to a third of all U.S. growth, and should it weaken, the economy could fall sharply. At that point, significant cuts in marginal income-tax rates would have the biggest impact in rejuvenating the economy.
Rebuilding support for free trade is critical as well. Globalization has probably played as important a role in generating growth in the '90s as tech spending. But its fruits--lower inflation, higher exports, more capital, greater availability of labor--often go uncelebrated, whether it's in the streets of Seattle or the halls of Congress. A downturn or financial crisis that turns protectionist could become a real threat to U.S. and world economic prosperity. The upcoming congressional vote on normalizing trade with China is a key test for globalization.
Making a few hard decisions on Internet policy would help maintain prosperity as well. Taxing sales on the Internet via a national sales tax is probably a bad idea. Using sophisticated software so that companies can collect sales taxes for each of the 50 states is a marginally better one. But using the advent of Net shopping to rethink the sales tax entirely is perhaps the best of all ideas. After all, it is among the most regressive of all taxes, hitting the poor the hardest. Extending the moratorium on Net sales taxes would not only promote high-tech growth but pressure states to reconfigure their tax structures.
One key policy decision to maintain prosperity has, fortunately, been made--the reappointment of Federal Reserve Chairman Alan Greenspan. Greenspan has shown an insightful feel for the dynamics of an evolving New Economy based on higher productivity. But it is an intuition that is not yet institutionalized at the Fed. All the more reason to have Greenspan at the monetary helm at this time.