WASHINGTON, April 25 (UPI) -- The UPI think tank wrap-up is a daily digest covering opinion pieces, reactions to recent news events and position statements released by various think tanks. Contents: GDP stays positive; Iraqi democracy; the right tax cut; views from Iraq.
The Center for Economic and Policy Research
(CEPR's goal is to ensure that citizens have the information and analysis that allow them to act effectively in the public democratic debate on important economic and social issues that their lives, by informing them about the problems and choices they face in an accurate and understandable manner, so they are better prepared to choose among various policy options.)
WASHINGTON --Declining imports and strong housing growth keep GDP positive
by Dean Baker
Nominal investment in equipment and software is down 11.4 percent from 2000. GDP grew at a weak 1.6 percent annual rate in the first quarter, up slightly from a 1.4 percent rate in the fourth quarter of 2002. A sharp decline in imports, which was replaced by domestic production, was the most important factor in this growth, adding 1.17 percentage points to GDP.
Consumption growth added 0.97 percentage points to GDP growth, and a 12.0 percent surge in housing construction added 0.53 percentage points. Declines in inventories and non-residential investment reduced growth by 0.48 percentage points and 0.45 percentage points, respectively.
The falloff in imports was undoubtedly attributable in part to war related disruptions. Exports fell as well, dropping at a 3.2 percent annual rate in the quarter. Even though the improvement in trade balance (measured in constant dollars) made a substantial positive contribution to growth in the quarter, the trade balance measured in nominal terms continued to deteriorate as a result of high oil prices.
The trade deficit in the first quarter was $485.7 billion, a record 4.5 percent of GDP. With oil prices back down, and shipping patterns returning to normal, there may be some decline in the nominal deficit in the second quarter, but the deficit measured in constant dollars may rise sharply.
The surge in housing was striking, especially since construction was already at a very high level. It is likely that housing construction will remain high until the housing price bubble collapses. With the rental vacancy rate hitting yet another record high in the first quarter, this collapse may be getting close.
Non-residential investment fell by 4.2 percent in the quarter. War related uncertainty helped to depress this figure, but the underlying situation is quite weak in any case, as the sector still has a long way to go before fully recovering from the collapse of the stock bubble. Nominal investment in equipment and software is 11.4 percent below its peak in the third quarter of 2000.
Consumption grew at a weak 1.4 percent annual rate, mirroring the weak growth of disposable income in the quarter. With the economy losing jobs, and wages stagnating, income growth has lost momentum. After running up debt at a very rapid pace over the last six years, many households are reluctant to add still more debt in such an uncertain economic environment.
In addition, the surge in car buying over the last two years is likely to limit demand in this sector. Falling gas prices may provide some boost to consumption in the second quarter, but this could be offset by the weak job situation and higher taxes and fees charged by state and local governments.
The state and local sector is getting to be a drag on growth. This sector, which accounts for more than 12 percent of GDP, was flat in the first quarter and rose by just 0.4 percent over the last year. Growth in this sector is likely to be negative in future quarters.
Net domestic product, which excludes depreciation, grew at a 1.2 percent annual rate in the quarter. Over the last year NDP grew by 1.4 percent, compared to the 2.1 percent growth in GDP. Until the 1980s, NDP and GDP had grown at almost exactly the same rate.
The gap in growth rates began to appear in the '80s and has expanded greatly in the last four years. Insofar as GDP growth is not reflected in NDP growth, it will not lead to any gains in living standards.
While the end of the war and the fall in oil prices should provide a modest boost in the 2nd quarter, this may easily be outweighed by negative factors. The most important of these is likely to be the cutbacks and tax increases in state and local governments, which must eliminate projected deficits in excess of $80 billion for the fiscal year beginning in July.
The resumption of normal trade patterns following the war, and occupation related spending, will cause the trade deficit to jump in the 2nd quarter. One final factor -- in addition to being a danger to world health, the possible spread of SARS is also a huge risk to the economy.
The Cato Institute
WASHINGTON -- Can Iraq be democratic?
by Patrick Basham
Is Iraq capable of moving swiftly from dictatorship to democracy? According to historian Bernard Lewis, an expert on the Muslim world, "In Europe, they are afraid it won't be possible. In the Middle East, they are afraid it will be possible."
As no Arab country is a functioning democracy, it's hard not to be pessimistic about the chances of Iraq establishing a stable, democratic political system. This pessimism stems from an appreciation of what causes democracy to flourish in a society. The long-term survival of democratic institutions requires a particular political culture that solidly supports democracy.
The building blocks of a modern democratic political culture aren't institutional (elections, parties, legislatures, and constitutions) in nature. Rather, they are found in apt economic conditions (rising living standards and a large, thriving middle class) and supportive cultural values (political trust, political participation, tolerance of minorities, and gender equality).
In practice, economic development stimulates higher levels of democratic values in the political culture. As a person's values change, these changes affect that person's political behavior producing higher, more stable levels of democracy.
The economic and cultural conditions prevalent in Iraqi society fall far short of what is found in all established democracies. Like many of its Arab neighbors, Iraq has failed to come to terms with the modern world. For example, significant numbers of Iraqis subscribe to a traditional tribal culture that manifests itself in everything from unquestioning obedience to tribal sheiks to such anachronistic customs as polygamy.
This is a deeply paternalistic political culture in which political leaders are frequently portrayed as larger-than-life, heroic figures able to rescue the masses from danger or despair. In such an environment, ordinary people adopt a political passivity that acts as a brake on the development of ideas, such as personal responsibility and self-help, central to the development of economic and political liberalism.
Iraqi political culture is characterized by "identity politics," i.e., the elevation of ethno-religious solidarity over all other values, including individual liberty. Hence, political freedom is an alien concept to most Iraqis.
Until free elections can be organized in a year or two, Defense Secretary Donald Rumsfeld advocates the formation of an interim Iraqi government composed of exiled Iraqi and Kurdish leaders, some of whom posses a modicum of practical democratic experience. Rumsfeld's suggestion acknowledges that those living outside of Iraq are far more cognizant of democratic norms and values than current Iraqi residents, most of whom grew up under the repressive rule of Saddam's fascistic Baath party.
Iraq's educated middle class can contribute to the reconstruction and democratization of their country; but it doesn't constitute a critical mass capable of moderating and channeling the political debate. However, most of the 1.5 million Baath party members will keep their regular jobs, as they collectively constitute the most skilled, yet undemocratic, constituency in Iraqi politics.
Recent Kurdish experience may be reason for cautious optimism but also demonstrates how slowly the collective mindset is changed. The largely autonomous regions of Kurdish-controlled northern Iraq are relatively freer and better off than the rest of Iraq.
But Kurdish political culture remains largely mired in terror-centered, Saddam-era authoritarianism. Frank political debate, for example, is almost unheard of, as tribal leaders from respective parties dominate specific regions and exhibit top-down leadership styles characteristic of the old Baathist party elite.
Saddam's adaptation of the Stalinist economic model led to a totally nationalized economy, central planning, wage and price controls, and, hence, a stagnant economy. The fact that the Arab world once led Europe in economic development suggests a turnaround is possible.
Over time, the introduction of capitalism will liberalize the economy en route to liberalizing Iraqi society. However, in the short-term an enormous financial burden may severely retard the economic development required for cultural change.
Economist Alan Krueger recently detailed the overwhelming debt load facing future generations of Iraqis. Will a newly capitalistic Iraq suffocate under the debt of the old regime?
Courtesy of the Iran-Iraq war, the invasion of Kuwait, and the Persian Gulf War, Iraq's financial obligations and foreign debt collectively stand at $383 billion, or $16,000 per capita in a country with a per capita GDP of just $2,500. Impoverished people do not place much value on the "luxuries" of political debate and dissent vital to civil society.
At this stage, optimists may care to consider Prof. Lewis's historical reminder: "In the Islamic calendar, this is the beginning of the 15th Century, not the 21st Century. They are at a different stage of political evolution. One hopes that in the not too distant future they will have a Reformation." But we should not count on such radical change occurring any time soon.
(Patrick Basham is senior fellow in the Center for Representative Government at the Cato Institute.)
The Heritage Foundation
WASHINGTON -- The right kind of tax cut
Listening to Washington policy-makers haggle over the size of President Bush's proposed tax cut -- $350 billion over the next decade? $550 billion? $726 billion? -- you would think nothing matters much beyond the price tag.
Just as important, though, is the type of tax cut they approve. Not all tax cuts are created equal. The wrong kind will do little to boost economic growth and create jobs.
Providing a $500 annual "rebate" to every taxpayer in the country, for instance, would reduce tax revenue significantly. But it wouldn't help the economy because rebates don't change incentives to work, save and invest. By contrast, eliminating -- or even reducing -- the "double taxation" of dividends would encourage more investment and boost the economy's performance, even though the amount of tax relief might be small compared to a universal rebate.
When designing the tax cut, lawmakers should consider the following questions:
-- Will it lower the cost of productive behavior? To encourage growth, a tax cut should reduce the tax rate on work, saving, investment, risk-taking and entrepreneurship. These are the activities that increase national income. As a rule, credits, deductions, preferences and exemptions don't help the economy grow faster.
-- Will it help America compete in the global market? It's increasingly easy for jobs and capital to migrate from high-tax countries like France to ones with relatively low taxes, such as the United States. The process, known as tax competition, enhances the rewards for nations with pro-growth tax policies.
-- Will it encourage job creation? Companies don't hire workers because they feel sorry for them or because they have a social conscience. They hire workers in the expectation of making a profit. High tax rates make labor more expensive and make it harder to fund the kind of improvements that boost worker productivity.
-- Will it reduce the bias against saving and investment? Between the capital gains tax, the corporate income tax, the personal income tax and the death tax, we impose up to four layers of tax on income that is saved and invested. Reducing or eliminating any of these layers gives entrepreneurs added incentives to invest in our economy.
-- Will it move us closer to a flat tax? Any cut that shifts the tax code closer to a system that taxes income only once and imposes just one low rate -- with no special favors -- will benefit the economy.
Under these criteria, three components of the president's tax plan should be preserved:
-- Eliminate the double-tax on dividends. Taxing dividends only once will make America more competitive and increase investment, making it easier for workers to get good jobs at good wages.
-- Put lower tax rates into effect immediately. Some of the tax cuts approved in 2001 don't take effect until 2004 and 2006. This is absurd. The economy needs help today.
-- Reduce the "depreciation" tax on small business. The tax code treats some business investment expenses as if they were taxable income. The president's plan would help us begin fixing this bizarre bias against new investment.
This short list of reforms doesn't mean that other tax cuts are misguided. Other elements of the president's tax package make good sense, such as a reduction in the "marriage penalty," that quirk of the tax code that forces many married couples to pay more than unmarried couples. But in a sluggish economy, pro-growth provisions should come first.
But, some will ask, what about the deficit? This is a legitimate concern, but pro-growth tax cuts never reduce tax revenues nearly as much as the critics predict they will. That's because lower tax rates encourage taxpayers to work more, save more and invest more.
As a result, national income increases and the tax base grows larger. One example: Tax revenues doubled during the 1980s because Ronald Reagan's tax cuts triggered an economic boom.
Lawmakers frequently talk of their desire to "stimulate" the economy. With the right kind of tax cut, they can do a lot more than that. They can put us on the path to sustainable, long-term growth. You can't put a price tag on that.
(Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation)
The Institute for Public Accuracy
(The IPA is a nationwide consortium of policy researchers that seeks to broaden public discourse by gaining media access for experts whose perspectives are often overshadowed by major think tanks and other influential institutions.)
WASHINGTON -- Aziz's "urbanity of evil", Kelly Back from Iraq's "12-Year War"
-- Norman Solomon, executive director of the Institute for Public Accuracy and co-author of "Target Iraq," participated in three meetings with Tariq Aziz last fall and winter in Baghdad.
"With Aziz in custody, top U.S. officials are patting themselves on the back. But theyhave only proven that victors are able to imprison the vanquished ... Aziz epitomized the urbanity of evil. He was articulate and deft at rationalizing government actions that caused enormous suffering. His similarities to top U.S. officials are much greater than we're comfortable acknowledging."
-- Kathy Kelly, co-founder of Voices in the Wilderness and the Iraq Peace Team, Kelly returned Thursday night to the United States from Iraq. Throughout the invasion of Iraq, Kelly was based out of the Al-Fanar Hotel in downtown Baghdad. She saw, firsthand, civilian casualties and the destruction of homes, hospitals and marketplaces. Kelly and her fellow Iraq Peace Team members also spent days talking with U.S. soldiers who were stationed in front of the hotel.
"The Gulf War never ended -- it was a 12-year war. What people in the United States never knew about is the hundreds of thousands of Iraqis who died as a result of the sanctions. The responsibility for those deaths lies as much at the steps of U.S. policy makers as it does before Iraqi leaders. Impoverished Iraqis blamed their local elites for their plight, not realizing what U.S. policy was in terms of maintaining the sanctions no matter what. Never again should economic sanctions be used in such a manner."
