A Full Plate For The President Elect

President-elect Bush will face some difficult economic decisions as soon as he settles into the White House in January. Contrary to the optimistic conventional wisdom of most forecasters, the economy is decelerating faster and steeper than anticipated. It may level out for a soft landing--but it may not. If not, the long-term income-tax cuts that Bush campaigned on could prove to be less than effective in dealing with a New Economy cyclical downturn.

BUSINESS WEEK's Investment Outlook for 2001 shows that the vast majority of analysts think the economy is slowing, to a growth rate of around 3% for 2001. Consumer spending is sure to decline as the wealth effect dissipates, along with dreams of double-digit returns from stocks. But the real determinant of how bad the slowdown gets will be corporate capital spending. Investment in information technologies has driven the economic expansion since the mid-1990s. It is uncertain how far corporations plan to pare back. The truth is, no one really knows because we haven't been to this place in the New Economy business cycle before.

But if capital spending does dry up, incentives to promote investment would be the way to revive it. That means speeding up depreciation timetables to get companies to replace their high-tech gear faster, promoting the rollout of broadband to consumers, and working closely with the Federal Reserve to get interest rates lower, faster. Lower rates are perhaps the quickest way to get capital flowing again to big telecoms and small startups. Any huge tax cut could hamstring the Fed in loosening monetary policy.

The President-elect could also face some kind of global financial crisis as Asia, Latin America, and other parts of the world scale back their growth in the face of a U.S. slowdown. He may have to make decisions on the role of the International Monetary Fund, which has been busy of late putting out fires in Turkey and Argentina. Then there's the dollar, the price of oil, the euro.

Welcome to the White House, sir.

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