U.S. economy - financial fantasia

By Eli Fishman

As the economy continues to stall, our elected officials persist in summoning the standard corrective actions. These include:

Lower interest rates, already at their lowest level since 1961.

Reduced tax rates, disproportionately benefiting the rich.

Increased government spending through the financing of the possible Iraqi invasion.

Though various combinations of these remedies have traditionally produced some desirable results, resorting to these vapid formulas in view of the immense structural changes in economic underpinnings will be ineffective.

In the past, reduced interest rates were a significant incentive for capital-intense manufacturing businesses to borrow cheap money for the purpose of investing in new machinery. The equipment would increase the company's productivity. It would also provide the means for a company to expand, creating new jobs. A low interest rate would enable a company to realize an attractive return on its borrowed and invested capital.

Manufacturing, software and service companies are no longer making investments in their U.S. facilities. Electronics companies are building plants in China. Software firms are investing in India. Footwear and apparel companies are expanding plants in Vietnam. Aerospace technologies are going to Korea, England and Japan.

Reducing income-tax rates benefits wealthier individuals if, for no other reason, they pay a substantially lower percentage of their incomes into Social Security than those earning average wages. It was postulated that wealthier people would use their tax savings to consume more goods. The consumption would create a need for more production. The need for higher levels of production would lead to more jobs. This was described as a trickle-down effect.

Assuming this process had credibility in the past, it has no relevance in the existing economic climate.

First, the goods being purchased are less likely to be U.S.-made. Consequently, increased personal consumption will not lead to many more U.S. jobs.

Second, the whole trickle-down thing is suspect. According to the Federal Reserve, between 1992 and 1998 the wealth controlled by the top 1 percent of U.S. households increased to the point where it exceeded the wealth controlled by the bottom 90 percent by a margin of 34 percent to 31 percent. This is evidence of a trickle-up process.

Letting companies pay less taxes so they have more to re-invest seems like a good idea. However, they are already paying minimal taxes. Multinational companies have developed sophisticated dodges. Their profit is reported in foreign countries offering attractive tax incentives. Many of their costs are reported in the United States, reducing their taxable profit.

Increased government spending was the proposed solution to the Depression. The alphabet soup of government programs put many people to work but did not significantly improve the economy. It was the development of America's industrial strength during World War II that provided the foundation on which to build an economic colossus. Bombing Iraq would not provide much of a stimulus.

Neither political party seems to have a clue. Politicians like short-term, feel-good solutions regardless of their long-term effectiveness. Currently, it is in the best interests of companies to export good U.S. jobs to low-wage countries. Incentives must be enacted to reverse the trend, or no one will be left to do anything.

Eli Fishman of Cape Girardeau is the president of Cape Shoe Co.