- The Washington Times - Monday, February 5, 2001

PALO ALTO, Calif. This is the year Alan Greenspan hopes to make amends for needlessly raising interest rates to slay an invisible inflation monster that only he could see, while sandbagging the economy because it was too robust for its own good.
The Fed chairman now fears what the rest of us warned would happen that the economy has slowed to a crawl and may tumble into a recession in the first half of this year.
The economy was racing along at a strong 5 percent annual growth rate full throttle until Mr. Greenspan slammed on the brakes with six consecutive interest rate increases to slow it down to a "more sustainable" rate. He said the country could not sustain such growth, which he feared would ignite inflation. But there was no inflation to speak of, and there is no evidence strong economic growth leads to inflation.
Jobs were plentiful. Workers were making the best money they had in years as incomes continued to rise. The stock market was booming, and millions of Americans were becoming shareholders in the American economy. After years of stagnant incomes, workers were at last reaping the dividends of their record productivity.
Mae West once said that "too much of a good thing can be wonderful," but Mr. Greenspan on economic matters, at least doesn't think so. So he raised rates, which made business loans and consumer credit more expensive and sapped liquidity from the economy.
Predictably, the economy grew weaker, weaker than Mr. Greenspan expected. If anything, the experience may have taught him and the rest of the Fed governors that sledgehammer interest-rate increases are not only very dangerous, they are also usually counterproductive. Better to let the markets and the laws of supply and demand work their will, allowing capital to follow the most promising opportunities for a better return on investment. The dot-com markets were correcting themselves, anyway.
The grim result of Mr. Greenspan's root-canal policy is that the economy may have come to a dead halt. The CEO of Hewlett-Packard, commenting on December's stalled sales figures, said last week it was as though someone had "turned a switch" to the off position.
Auto sales were in an especially deep slump. Daimler-Chrysler is slashing 26,000 jobs at its Chrysler division. GM has laid off 14,400 workers. Elsewhere, J.C. Penney, Xerox, Whirlpool, Lucent and WorldCom are cutting thousands of jobs.
The jobless rate, always a lagging indicator, remains at a 30-year low, but with new job creation slowing, it is only a matter of time until these and other layoffs begin to swell the national unemployment rate.
Mr. Greenspan's rate increases landed on the Internet sector of the economy like a ton of bricks, wiping out 12,828 jobs in January alone, after 10,459 jobs were lost in December. Amazon.com is cutting 1,300 jobs, as sales fell in the fourth quarter. Being hit hardest in this sector are companies that build and maintain the devices that make the Internet work.
Needless to say, this is taking a toll on consumer confidence. It is now at its lowest since 1993, according to the latest Conference Board survey. That means cutbacks in consumer spending, which accounts for two-thirds of the country's economic activity.
The Fed's latest move, its second interest-rate cut in a month, will inject needed liquidity into the economy. But the cuts will take months to work their way through the system, and the economy's downturn may be deeper than even the Fed understands.
But tax-cut help is on the way.
As the economy continues to worsen, political pressure is building in the country and in Congress in favor of President Bush's across-the-board income tax rate cuts. Certainly, tax cuts are needed now more than ever to get the economy growing again. The only question now is how big the tax cuts should be.
There is nothing wrong with America's technology industry, and the stock market in general, that a strong dose of venture capital couldn't cure. Lower tax rates and another cut in the capital gains tax rate would release needed investment capital, which has been drying up for months, starving the startup firms that are the life blood of a dynamic economy.
The Democrats are still stubbornly opposing Mr. Bush's $1.6 trillion tax-cut plan, saying they will agree to no more than $800 billion over 10 years.
But two powerful forces are coming into play that are going to overcome this opposition in the coming weeks: The fear of a voter backlash if the economy continues to weaken and layoffs spread, and the surprising Congressional Budget Office forecast that the tax surplus will be more than $5.6 trillion over the next 10 years, $1 trillion higher that the CBO's previous estimate.
The argument for using a portion of this surplus for tax cuts, as Mr. Bush proposes, is simply this: If we don't, Congress will spend the money on bigger government. But if we give it back to the people who earned it, they will save, invest and spend it far more wisely. And that will create a stronger, more recession-proof economy.

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