- The Washington Times - Wednesday, October 17, 2001

The terrorist attacks of Sept. 11 have taken a mighty toll on our nation first and foremost, inflicting a staggering loss of life and putting our nation at war.
Of course, a massive terrorist attack that kills thousands of people and obliterates entire buildings housing businesses and government agencies can only be bad for the economy as well. For the near term, a significant degree of economic uncertainty will linger, and that is not good for markets, for investment or for consumer confidence.
What makes matters even worse in economic terms is that prior to Sept. 11, the economy already had slowed dramatically. In late September, the Commerce Department placed its estimate of real economic growth for the second quarter of this year at a dismal 0.3%.
In fact, as economist Lawrence Kudlow first noted, the U.S. economy actually had experienced a private- sector recession during the first half of 2001. Overall economic growth numbers received a boost from big jumps in government spending during the first two quarters of this year. When government is excluded, the private-sector economy actually contracted for two straight quarters.
As is usually the case when the economy derails, this slowdown could be traced to misguided government policies. For example, the Federal Reserve contributed significantly through misguided interest- rate increases in 1999 and 2000, and some sluggishness earlier this year in reversing course and providing necessary liquidity. However, in the aftermath of the World Trade Center and Pentagon attacks, the Federal Reserve cut the federal-funds rate by an additional 50 basis points on Sept. 17, and seems to be moving aggressively in the right direction in terms of monetary policy.
However, more than just misguided monetary policy is at issue. Federal revenues, including individual income-tax receipts, have reached record highs and threaten to linger there for a record length of time.
Make no mistake, extracting massive amounts of resources from the private sector (where incentives point to more entrepreneurship, efficiency and innovation guided by profit and price signals) and dumping them into the public sector where incentives for waste prevail, guided by politics and the acquisition of power are dire trends.
In the past, the various high points in federal revenues generally corresponded with a slowdown in the economy or a recession. Thanks largely to the small businesses and entrepreneurs that were boosted by the 1997 capital gains tax cut, the U.S. economy proved quite resilient and grew solidly from 1997 to 2000. However, the economy did begin slowing in the third quarter of 2000, and subsequently continued to slow.
Unfortunately, if the Bush budget estimates for federal revenues and income taxes as shares of GDP are even in the ballpark over the coming five to six years, the U.S. economy will continue to experience record high tax burdens for record lengths of time. Overall, the U.S. economy is projected to suffer through nine consecutive years with federal tax revenues topping 19 percent of gross domesitc product (GDP) including a stretch of four years at or above 20 percent and individual income taxes at or above 9 percent of GDP (including two years above 10 percent). The United States has never before experienced such an extended period of high levels of taxation.
Unfortunately, the pro-growth aspects of the Bush tax cut the across-the-board income tax cut and the elimination of the death tax take far too long to phase in to provide an adequate policy response in the near term, considering the economic slowdown we already had been experiencing. This is particularly true now that we face terrorism and war.
A sound, growing U.S. economy is crucial. While obviously moving on defense and intelligence issues, Congress and the White House also should follow the Federal Reserve's lead and implement a pro-growth economic package that will boost critical incentives for investing and entrepreneurship. That should include the elimination of, or at least deep cuts in, capital-gains taxes for both individuals and corporations, allowing for the expensing of capital investments and immediate implementation of the Bush income tax cuts (passed earlier this year but not due to be fully phased in until 2006) and cutting corporate income-tax rates.
Make no mistake, the civilized world is now looking to the United States for moral, military and economic leadership. We cannot, and will not, falter.

Raymond J. Keating is chief economist for the Small Business Survival Committee and co-author of "U.S. by the Numbers: Figuring What's Left, Right, and Wrong with America State by State."

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