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December 5, 2000

Cheney Says Recession Could Be Around Corner
By Bloomberg News

Tax Cut Won't Save This Sinking Economy ... Weiss comments

WASHINGTON - George W. Bush's running mate said the U.S. economy "may well be on the front edge of a recession," and the Texas governor would push hard for a $1.3 trillion tax cut if he assumes the presidency.

Dick Cheney said the tax cut would provide the stimulus the economy needs.

"I would hope that [the state of the U.S. economy] would change's people's calculations about the need for the tax cut Governor Bush has recommended," Mr. Cheney said on NBC's Meet the Press.

Just Saturday, Mr. Bush said that there were signs the economy, now in its record 10th year of expansion, is slowing.

"There are some warning signs on the horizon about our economy," he said, as he met with top Republican congressional leaders at his ranch in Crawford, Texas.

Mr. Bush holds a 537-vote lead in Florida that would give him the presidency if it survives a challenge from his rival, Vice President Al Gore.

Mr. Cheney, the former defense secretary, said there are a growing number of signs the economy is contracting, and that would help a Republican administration get its tax plan enacted.

"We're seeing it in automobile sales and a lot of other areas, earnings falling off for corporations," Cheney said, echoing Mr. Bush's statement.

Democrats say they back a tax cut, too, just one about a third the size the one Bush proposes - and they said they didn't see a recession.

"I think we're seeing a needed slowdown in the economy," said Rep. Richard Gephardt, minority leader in the House.

The gross domestic product expanded at a 2.4 percent annual rate during the third quarter of this year, the Commerce Department reported last week. That's down from a 5.6 percent growth rate in the second quarter and an 8.3 percent pace in the final three months of last year.

Federal Reserve officials say a slowdown in growth is needed because it was too rapid at the end of last year.

During the presidential campaign, Mr. Bush proposed a $1.3 trillion cut through 2010 that would gradually reduce marginal rates across the board and reduce the number of rates from five to four.

He also would double the child credit to $1,000, repeal the estate and gift tax, and extend deductions for charitable contributions.

Bravo for Mr. Cheney -- we're always in favor of tax cuts. They DO tend to stimulate the economy by taking money out of the government's grubby paws and putting it back to work. But the bad news is there are some holes in his plan.

First of all, the economy is sinking so fast, a mere tax cut won't save it. The economy grew by 2.4% in the third quarter, which is half the growth in the second quarter and its slowest pace in four years. That sudden drop means the Fed's "soft landing" is turning into a nosedive.

Despite today's impressive gains, the stock markets are in serious trouble -- "big time," as Mr. Cheney might say. Let's just look at the Nasdaq:

  • The Nasdaq lost 23% in November alone, its most dismal performance in 13 years. Through yesterday, the Nasdaq had lost almost half its value from its all-time high of 5048.62 on March 10.

  • But it's still overpriced! For the Nasdaq get back to its 28-year mean, it would hit about 1600 by the end of this year. That's down about 40 percent from Friday's close and about 68% below the Nasdaq's high in March.

  • Since October 1, earnings growth expectations for tech stocks have dropped from 29% to 14% for the fourth quarter. And analysts expect continued poor results in the first quarter of next year. Fact is, this horror show is just starting.
The problems aren't just limited to stocks. The U.S. Labor Department will report crucial unemployment figures for November on Friday. The jobless rate was at a 30-year low of 3.9% percent in October, and Wall Street is banking on a rise in unemployment to take pressure off inflation.

But wage pressures are going up, not down, because thousands of highly trained tech workers are demanding higher pay as their stock option in sinking tech companies becomes worthless. There's also a nation-wide unionization movement starting at tech and net companies. If successful, that is going to send labor costs soaring.

And the last piece of bad news we have for Mr. Cheney is that U.S. fixed-income markets are already pricing in up to three interest-rate cuts of 25 basis points each by the Fed in coming months. But that's pretty optimistic, considering that soaring fuel prices -- wholesale natural gas prices up by more than 10 percent to record highs yesterday -- is turning up the pressure cooker on inflation. The Fed is terrified of inflation. When it doesn't deliver those rate cuts, the markets are going to nosedive.

Can all this be fixed with a tax cut, especially one that will cause the government to surpass the $520.8 billion Uncle Sam borrowed last year? There will be no surplus, folks -- that's a cruel Washington fairy tale. And we don't think this bearish economy is going to give Mr. Cheney a happy ending.

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