- The Washington Times - Thursday, July 19, 2001

There are growing signs that the American economy is poised to turn around in the last half of this year, while the economies in Europe and the Pacific Rim are looking gloomier than ever.
The emerging economic signals here give us reason to be optimistic about the future. Interest rates are falling. Inflation is tame. Tax rates are coming down. Retail sales are rising, pushed by a surge in new car sales. And consumers and businesses are getting the equivalent of a big tax cut in declining energy costs. Economists are a little more hopeful things will turn upward.
Consider this conclusion reached by the Joint Economic Committee of Congress in its latest Assessment of the Current Economic Environment: "Currently, several forces making for a near-term slowdown have reversed themselves or are on the wane and moving in the right direction," said Chief Macroeconomist Dr. Robert Keleher of JEC.
Energy prices are falling, with gasoline prices — now averaging $1.41 per gallon — at their lowest levels in four months. Prices for regular gasoline are 13.3 cents below what they were a year ago.
Wholesale energy costs fell 2.5 percent last month, the strongest one-month drop since a 3.5 percent decline in April 2000. Notably, residential energy costs declined 1.5 percent and natural gas plummeted by 5.8 percent. That factor, plus others, led to a 0.4 percent decline in the producer price index, the best set of numbers on wholesale inflation in 28 months.
Interest rates are falling, reflected in lower home mortgage rates, consumer home equity loans and bank loans to businesses. The average yield for one-year Treasury bills, a major index for setting adjustable rate mortgages, is down.
Consumer spending — which accounts for two-thirds of our economy — seems to be holding up as the U.S. Treasury gets ready to send out some 90 million tax cut rebate checks this summer that will inject about $40 billion worth of liquidity into the economy.
The core annual inflation rate at the wholesale level, driven down by falling energy prices, is just 1.6 percent. U.S. goods will be more competitive than ever in the coming months, encouraging consumers to lead this economy into a strong recovery stage.
But any U.S. recovery will be offset by the deep economic weaknesses that persist throughout Europe and the Pacific Rim.
Japan, refusing to cut its income tax rates, has slipped back into recession, along with most of its Asian neighbors. Week after week, Asian stock markets demonstrate continued weakness as capital flees for safe havens like U.S. Treasury bills and King Dollar.
Europe, suffering from overregulation, trade tariffs and other forms of protectionism, the costs of a crushing welfare state, high interest rates and a weak Euro, is trapped in an economic malaise of its own making.
Tired of Europe's excuses, Treasury Secretary Paul O'Neill lectured the finance ministers of the world's biggest industrial countries earlier this month to get their economic house in order. The U.S. was doing its part, cutting interest rates, cutting tax rates, beginning to slow the growth in federal spending. Now Britain and Europe have to step up to the plate and take similarly strong action, he told them at the G-7 meeting.
Mr. O'Neill's lecture followed his blast at the European Union — which he delivered in an interview with me earlier this month — in which he attacked the EU's move to kill the GE-Honeywell merger, accusing the EU of "reaching into the affairs of other countries" and abusing its antitrust authority.
It is ironic that outside of the U.S., Russia and China are the only other major world powers who have taken bold economic measures to expand their economies. Russia has cut its tax rates for workers, replacing it with a 13 percent flat tax, and is becoming one of the fastest-growing economies in Europe.
China is further liberalizing its capitalist system, privatizing state-run enterprises and preparing to eliminate or lower trade barriers when it officially becomes a member of the World Trade Organization later this year or early next year.
President Bush should forcefully address the economic weaknesses that have kept Europe and the Pacific Rim on the list of sick global economies. Like Ronald Reagan before him, he needs to talk about the pro-growth policies that are the prerequisite to an expanding, competitive, thriving economy: low taxes, low interest rates, free trade and free markets.
The light of free market ideology has dimmed in these places in the past decade as Europe and Japan have sunk deeper into the quicksand of regulation, protectionism and public works spending that have failed to rescue their economies. Mr. Bush needs to begin talking more about the problems that now beset the global economy. There is nothing that ails it that a little unfettered, free- market capitalism cannot cure.

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