A flat freight market notwithstanding, business has reason to believe in a robust economy, James K Glassman told the annual meeting of the Truckload Carriers Association. Glassman is a fellow at the American Enterprise Institute and was host of Capital Gang Sunday on CNN. The TCA annual meeting was held in San Antonio, Texas, April 8 to 11, 2001.

Although stock value has dropped recently, investors have every reason to remain confident in the long-term prospects for stock ownership, Glassman said. As recently as eight years ago, the Dow-Jones stock index stood at 3,528. Within the past year, that index has been above 11,000. It was roughly 9,500 when Glassman spoke and has rebounded to nearly 11,000 recently. Investors who put money into stocks eight years ago would have seen a 300% increase in their holdings, he said.

As recently as 1982, the Dow was only 772. By late 1996, it rose to well above 6,000. The market has risen another 50% since 1996. This is an indication that investors have recognized the true value of stocks, Glassman said. While stocks are a risky investment in the short run, a modest increase in the national economy will produce a large gain in stock value over a long period.

Invest at Low Point

“Downturns in the stock market are the proper time to invest in stocks, just as downturns in business are the proper time for managers to become more efficient,” Glassman said.

The US economy has slowed significantly in recent months, Glassman said. The drop has been from a growth rate of 5.6% early in 2000 to 2.2% by late 2000 to only 1.1% by year-end. “My guess is that the economy has not fallen into the classical definition of a recession — two consecutive quarters with no growth,” he said. “Whether the economy meets that classical definition or not doesn't matter, because this feels like a recession in many economic sectors. The drop has been from 5% growth to only 1% growth. That may not be a recession, but it hurts just about as bad. One study of business in the San Francisco Bay Area projects that 80% of the remaining dot-com companies will be out of business by the end of this year.”

Recession or not, some parts of the economy retain their strength. Consumer spending remains healthy, and unemployment is only 4.3%, well below the level that many expert economists predict the economy can withstand without triggering rapid inflation, Glassman said. Even a shallow recession hurts. In the mild recession of the early 1990s, unemployment reached 7%, putting millions of Americans out of work.

Factors in the Slowdown

A number of factors have worked together to slow the economy. While no single factor could have caused this slowdown, the combination of four has had a nearly devastating effect, Glassman said. The first of these factors was a series of interest rate increases from the Federal Reserve Board. When the Fed began those rate increases to forestall inflation in the middle of 1999, the increases were far too aggressive, he said.

To make matters worse, the drop in interest rates did not begin soon enough. The Fed should have begun to lower rates in late 2000, but the actual rate cuts did not come until the early months of 2001, Glassman said.

The second factor in the slowing economy was a 300% increase in oil prices. Eight of the nine recessions since World War II, including all of the last four recessions, have been preceded by a rapid increase in the price of oil, Glassman said. High oil prices and high interest rates are a deadly combination. “The Fed should have begun to cut interest rates as soon as it saw the economy slowing in response to high oil prices,” he said.

Taxes Stifle Growth

The third factor in the slowdown has been the drag of high taxes on the economy. Federal tax collections as a percentage of economic output are at their highest level since 1944 and 1945, the last years of World War II, Glassman said. The federal treasury will have a surplus of roughly $300 billion for 2001 following a surplus of about $250 billion for 2000. Tax revenue continues to flow into Washington like a tidal wave, he said.

“The result of this taxation is that cash, which could be used for consumption or for new private investment, is being used to retire bonds,” Glassman said. “Typically, investors use the returns from bonds to buy more bonds. This tax money should, instead, be left in the private economy so that business could use it for investment.”

The fourth reason for the slowing economy is the end of the high-tech enterprise zone, Glassman said. In the past year, the government intervention in the high-tech sector has become increasingly active. If this continues, the economy may begin to suffer from a regulatory recession. In fact, that recession may have already started. It might be no coincidence that the high-tech stock sector began its 50% decline at the same time the Justice Department announced its move to break up Microsoft, he said.

All the news is not bad, Glassman said. Two hundred years ago, economic growth was almost nonexistent. Real growth began with the industrial revolution. With only modest growth in those 200 years — 2% a year — the standard of living in developed countries has increased by a factor of 50. At a mere 3% growth rate, the standard of living can increase 800% in the lifetime of a single person, he said.

19-Year Expansion

The US economy has been expanding for longer than ever before. It has been growing for 19 years with only a slight dip in 1990-91. Nothing like this has ever happened before, Glassman said. This growth has occurred without any real inflation, which results when demand outpaces supply.

Recessions are the normal economic response to an imbalance between supply and demand, Glassman said. The US economy has experienced nine recessions in the 56 years since World War II, but only one shallow recession in the past 20 years. Most economists believe that this happened because demand has not been able to run ahead of supply in those 20 years, he said.

Glassman said that supply has been able to keep up with demand for three reasons. The first of these is the spread of free trade. In the past, when demand peaked, industry found it impossible to increase production fast enough. During the past 20 years, free trade has allowed expanding economies to satisfy increasing demand with supplies from other economies. In fact, free trade has involved more than just goods. Recently, the US has had the benefit of free trade in goods, in people, and in capital, he said.

Immigration Benefits Supply

Liberal immigration policy has been beneficial to the US, while the Europeans and Japanese have seen their economies suffer, Glassman said. The result of restrictive immigration in Europe and Japan where outsiders are not wanted is a cap on supply. Those economies run into the supply barrier and suffer from inflation and recessions much quicker than the US economy, he said. In the US, people are available to produce needed goods. Goods from other producers are available because US workers have the money to purchase those goods. Finally, in a free-trade world, capital can move to those places where it is most productive. That place is the US where it is used to build new factories and produce the goods demanded by workers.

A second reason for the success of the US economy is its low tax rates relative to other developed nations. “In my opinion, taxes are still too high, but remember, when Ronald Reagan was first elected, the top tax rate was 70%,” Glassman said. “Relative to Europe, taxes are low, although many small companies still pay tax at the top personal rate. Low taxes liberate capital for investment which, in turn, creates wealth.”

Better monetary policy also is a reason for economic growth. Alan Greenspan and Paul Volker, before him at the Fed, have done a good job of holding down most interest rates, Glassman said. Low interest rates encourage investment, which translates rapidly to increased supply and a healthier economy.

Computers Enable Productivity

Productivity has grown from only 1% in the 1970s to almost 3% a year for the past five years. Much of this increase can be traced to the availability of low-priced network computers, Glassman said. These computers have boosted productivity by increasing the amount of information available to managers as well as reducing the uncertainty of the business environment. No longer do businesses need to maintain high levels of redundancy in workforce, inventory, plants, and equipment.

“The old economy has been the main beneficiary of innovations developed in the new economy,” Glassman said. “Transportation has been revolutionized by powerful logistics software, by remote communication technology, and by things as simple as GPS tracking of loads and equipment.”

The economy is in fairly good shape, but it can be revived to its former strength, Glassman said. The first step in that revival would be for the Federal Reserve to continue its pattern of reducing interest rates. “I believe that rates should drop all the way to 3½% by mid-summer,” he said. “Some people think that rates should be dropped more quickly than is happening now, but it really doesn't matter.”

Cut Taxes Deeply

The next step would be for Congress to follow through on the Bush plan to cut taxes, Glassman said. This plan was first discussed 18 months before the election. Then the president presented the Congress with exactly the same plan that he had proposed during the campaign. The stunning result is that the Senate voted 65 to 35 in favor of tax reduction just a year after no Democrat in the Senate would endorse lower taxes, he said.

“In my opinion, the tax cut is not big enough,” Glassman said. “A tax cut is necessary, not only to spur the economy, but to keep Congress from spending the surplus. Governments should not have surpluses. The money should be kept in the hands of the people who earned it. If the surplus is not returned to the people, it will be spent. That's what politicians do; they spend tax money.”

The third step toward economic revival is the formulation of a clear energy policy for the US, Glassman said. That policy must concentrate on increasing supply. In the past 10 years, little, if any, effort has been made to increase the supply of energy in this country, because of restraints on industry from excessive environmentalism, he said. Other restraints on energy production have come from general regulatory excess.

“In his favor, President Bush has rejected the Kyoto Treaty which, three years ago, also was rejected by the US Senate by a 95 to zero,” Glassman said. “That treaty would wreak havoc with the US economy. It would cut growth by at least 3% and would raise the price of fuel 65 cents per gallon, costing the US 2½ million jobs.”

Overhaul Regulatory Policy

The fourth and final step for reviving the economy would be a thorough overhaul of US regulatory policy, Glassman said. This would include the antitrust policy from the last years of the Clinton Administration. Five years after deregulation, a great deal of the telecommunications industry remains under excessive regulation. At least, the Bush Administration was able to stand behind the effort in Congress to rescind OSHA's ergonomic regulations imposed just as Clinton left office.

“The US economy has shown that when supply is liberated, growth can jump to 4%, even 5%, without inflation, roughly double the average since World War II,” Glassman said. “With interest rates reduction, tax cuts, and a sensible energy policy, we can revive prosperity that will improve the lives of more Americans than were touched by the boom of the 1980s and 1990s.”