Evans On The Economy -- And Now For The 'Evans' Stimulus Plan

Dec. 21, 2004
It's all about taxes, exchange rates and tort reform.

President Bush has made his $670 billion proposal to revive the U.S. economy. The House Democrats have released their more modest $136 billion plan. Now it's my turn. I have three suggestions. First, send the value of the U.S. dollar back to its equilibrium level. Second, cut tax rates so that they stimulate economic activity, instead of acting as yet another transfer payment to the poor. This means ignoring the braying of Democrats that the "rich" are getting most of the tax cut. Of course they are. The "rich" -- defined in the Democratic lexicon as anyone with an income above $125,000 -- pay 96% of all personal income taxes. Third, institute meaningful tort reform. In some circles it is considered even worse etiquette than spitting on the rug at an elegant dinner party to suggest that the dollar is too high and ought to be reduced to its equilibrium level. But that action would provide a powerful stimulus. Suppose the value of the dollar were to decline by 15%, bringing it back to equilibrium. According to my estimates, over a two-year period, the price elasticity of exports is about -0.7 and for imports is about -0.4. Figuring that U.S. exports are about $1 trillion, and imports are about $1.5 trillion, a lower-valued dollar would boost exports by about $100 billion and reduce imports by about $60 billion, all other things being equal. About $80 billion per year would be added to the growth rate over a two-year period, and, with a modest multiplier effect, that would add 1.2% to 1.5% per year to the overall U.S. growth rate. Not bad. The downside probably is that some traditional allies, such as the Germans, Japanese and Chinese, would become very upset. It's going to be more difficult to cut government spending, another element in the Evans plan, especially with a war going on. This can be done, but it would take real leadership, because it means taking on the tort lawyers and their partners in crime, the Democratic leadership. Let's look at some numbers. For the first time in fiscal year 2003, federal spending on health care -- Medicare plus Medicaid -- is expected to narrowly exceed total Social Security benefits including disability. The projected numbers are $472 billion for health care and $470 billion for Social Security. (Ten years ago the figures were $288 billion for Social Security and $208 billion for health care.) According to various private-sector surveys, actual health care costs jumped 14.7% last year, with another 14% gain predicted for this year. Prescription drug prices jumped 20%. But a look at the financial statements of major drug companies shows anemic gains at best. Physicians and other medical-care personnel have suffered declining real income for several years. Meanwhile, hospitals are hardly raking it in. The problem is an explosion of legal costs, the total impact of which far exceeds the actual settlements because of the tremendous amount of over-testing and over-medication that doctors and hospitals routinely order to protect themselves from frivolous lawsuits. In summary, here again is my prescription for what ails the U.S. economy: Reduce the value of the dollar to its equilibrium level, cut tax rates to improve investment incentives and adopt meaningful tort reform. We'll see if anyone in Washington, D.C., is listening. If they aren't, then the real growth rate of the U.S. economy this year will be even more anemic than the 3% increase posted in 2002. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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