The rapid U.S. economic recovery from the recession has been
underway for the past 3.5 years, and the growth rate is now slowing
down. For the past three years, the U.S. rate of expansion has been
double that of Europe. For this year and 2006, the rate is expected
to be about the same as its long-term rate.
The 2001 cuts in income taxes helped to avert what in 2000 and
2001 appeared to be a coming recession. Fortunately, however,
negative economic growth was only 0.4 percent of gross domestic
product in the third quarter of 2001 and was limited to that
three-month period.
Analysis of the 2001 and 2004 IRS tax schedules showed the lower
income groups obtained a 22 percent reduction in their tax rate,
the middle income group obtained a 16 percent reduction, and the
highest income group received a 12 percent reduction.
Thus, the tax structure became slightly more progressive, as the
upper income group took over a somewhat larger share of the total
tax burden. The cost of the national debt, as measured by the rates
of the interest expense to national income, has declined from 2.5
percent to 1.5 percent for the current fiscal years.
The tax cuts early this decade were in accordance with the
Employment Act of 1946, passed by the U.S. Congress. The goal was
to use an expansionary fiscal policy during periods of economic
recession to help keep any downturn brief and mild. This policy was
cultivated in the early ’60s and ’80s, and again
produced substantial economic benefits.
Such fiscal policy reflects what was learned from the long
depression of the 1930s. This policy was also based on economic
theory and common sense.
The U.S. economy has been showing sharper increases in the size
of its international trade deficit, rising steadily from $100
billion in 1997 to over $600 billion this year.
Since wage rates in the United States are three to 10 times
higher than in most other nations, trade deficits are to be
expected and have been continuous for the past 30 years. As a
result, manufacturing jobs have decreased from 18 million 30 years
ago to 14 million this year. For the same period, service jobs rose
from 55 million to 110 million.
In foreign trade, the United States receives goods and exporters
receive dollars. Their funds are then largely invested in U.S.
stocks and bonds. Thus, the exchange involves goods for financial
instruments. Both partners appear to like the exchange and there is
no set limit to the volume that is sustainable.
The California economy in the past has shown the same cyclical
behavior as the nation. California non-farm employment now totals
14.7 million and by the end of next year it is expected to reach 15
million.
The strong recovery from the recession has led to a greatly
increased flow of funds to the U.S. Treasury, Social Security Trust
Fund and state and local governments. For California, revenue is up
by $3.9 billion more than had been expected. As a result, the
planned cut-backs in social programs have been either controlled or
reversed.
As the world economy becomes increasingly industrialized,
capital-intensive, dynamic and competitive, economic forecasting
has become less certain. This necessitates an increasingly careful
approach by business and government to their financial
planning.
It is hoped that planners will be reasonably successful in their
management of this crucially important task.
Andersen is a finance professor in the UCLA Anderson School
of Management. He also works on the Anderson Forecast.