Nick Smith, October 20, 2002

While the news has been dominated by the sniper and the confrontation with Iraq, I also remain concerned about the U.S. economy. Are we headed for a "double-dip" recession, or is the recovery going to gather steam? While no one can predict with certainty what is going to happen to the economy, it is useful to look at where we are, how we got there, and where we=re likely to be headed.

First, a recession occurs when Gross Domestic Product, the measure of goods and services produced in the economy, declines for two consecutive quarters. In 2001 there was negative growth in the first three quarters. The recession of the early 1980s was a double-dip recession, with the first starting in January and ending in July 1980, and the second beginning in July 1981 and ending in November 1982. The questions is, could a similar thing happen today?

It seems unlikely. That recession, like the most recent one, was pressured by high real interest rates. The Federal Reserve, after reducing the federal funds rate from 17 percent in March 1980 to 9 percent in July, caused the double-dip by raising rates back up to 19 percent by January 1981. Today, the real interest rate (after accounting for inflation) is near zero. Further, there is no indication that the Fed will reverse course and start hiking rates enough to lead to a recession.

Second, the economy has now expanded for three consecutive quarters, and it appears we will have growth in excess of 4 percent in the third quarter. This growth should begin showing up in increased earnings for firms, which in turn, will result in higher stock prices. Of the 176 firms in the S&P 500 that have reported quarterly earnings, 61 percent have exceeded Wall Street expectations. Since half of all American families directly own stocks and many others indirectly own stocks in the form of pension assets, this rise in stock prices will increase Americans' real wealth. This should bolster consumer confidence, encouraging business investment in plants and equipment.

Other countries are trying to produce better products at lower prices to take away our business, but we are witnessing productivity growth here at home that is unparalleled in recent history. America's computer and network technology have made it possible to produce goods and services with much less time and resources than it did only a decade ago. This trend is likely to continue. According to a new Federal Reserve study, there is a 42 percent gap between the technology now in use on factory floors and "best practice technology." This means that businesses have many ways to continue to improve their productivity.

This is not to say that Congress can't improve things. The current tax on U.S. business is about 40 percent (35 percent federal, 5 percent state). That compares to 30 percent in other industrialized countries. There is growing doubt in the business community that there will be business tax cuts in part because of the political criticism against cuts, i.e., "tax cuts for the rich." This hurts business expansion since businesses don't know what the tax consequences will be of investing in long-range productive capacity.

A strong economy is a critical part of national security. A strong economy exists when people have good education, good research, and appropriate incentives to produce goods and services, hiring people in the process. Taxes that are in line with foreign competitors, reasonable government regulations, the rule of law, and stable monetary policy provide those incentives. High taxes, excessive or uncertain government regulation, and swings in monetary policy lead to a weaker economy and rising unemployment. It's important to make sure Congress does what's right for our U.S. economy.

Congressman Nick Smith represents Michigan's 7th Congressional District in the U.S. House of Representatives.