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World: Slowing U.S. Economy May Mean Bad News for Europe, Too

Analysts say the latest economic troubles for the American economy already are hurting Asia, and could soon affect Europe. But these same economists tell our correspondent Andrew F. Tully that a tax cut proposed by U.S. President George W. Bush could help make the economy well again.

Washington, 16 March 2001 (RFE/RL) -- There has been little good news about the American economy for nearly four months. And most economists see similar economic bad news for much of the rest of the world.

But many analysts also say they believe a reduction in federal taxes, as planned by U.S. President George W. Bush, can help to stimulate the economy and restore its health.

America's economic troubles became evident in December, between the election of George W. Bush as the U.S. president and his inauguration. Early the next month, Bush spoke of "warning signs on the horizon" after an unprecedented 10 years of continuous economic growth.

These "warning signs" included a decline in consumer confidence and an increase in companies' inventories of unsold goods. This has led to lower consumer spending and less manufacturing, which fed upon itself and generated even lower consumer confidence and even greater inventories.

And now the American stock market is losing value even faster than it did through much of last year. Of particular concern is the Nasdaq index, which specializes in high-technology companies. Nasdaq has lost three-fifths of its value in the past 12 months, plunging from about 5,000 points last March to about 2,000 points this week. In fact, it has lost about one-third of its value in the past two months alone.

The biggest losers in this decline are high-technology companies and people who have invested heavily in these businesses. Until about a year ago, such enterprises were perceived as the winners in America's aggressively growing economy. Now they are going out of business, and their investors are taking staggering losses. The day of the young Internet millionaire has come to an abrupt halt.

But economists say they are not the only losers. There is plenty of less abrupt economic hardship to share outside the high-technology sector -- and outside the United States. Asia has been the first region outside America to feel an economic slowdown.

Gerald O'Driscoll -- an economist with the Heritage Foundation, a Washington think tank -- notes that Taiwan is heavily dependent on the U.S. market for its computer-related and other electronic products. And he told RFE/RL that other Asian countries usually sell much of the attire that they make to American retailers.

"[U.S.] department stores should be ordering for Christmas [sales at this time of year], and the orders aren't coming in, so the factories in Asia are getting idled by this."

O'Driscoll says countries in Western Europe -- already struggling to minimize the economic impact of foot-and-mouth disease in its livestock -- are also far more dependent on the American economy than many Europeans realize. However, he stresses that they are not as reliant on the U.S. as Asia is. And he says this economic malaise can even spread to Eastern Europe, whose emerging market economies rely so heavily on the West.

Simon Evenett, an economist with the Brookings Institution, a Washington think tank, agrees. He says the losses in the stock market are particularly worrisome in terms of reduced business investment.

"The stock market reductions will further accelerate the cuts in investment and of component purchases, and that will have a direct effect."

Bush expressed his concern about the economy on 14 March during a speech in the U.S. state of New Jersey, where he was promoting his plan to reduce the federal tax on the income of individuals and businesses.

"I'm sorry people are losing value in their portfolios [stock holdings]. That worries me. But with the right policies, I'm confident our economy will recover -- the right policies, fiscal policies. And that means giving people money back, in plain language." [Applause.]

The president proposes to cut taxes by $1.6 trillion over a 10-year period. He says that would give middle-class Americans more money to spend, and give the wealthy and businesses more money to invest. And Bush would make his tax cut retroactive to income earned last year. That, he argues, would make its effect immediate.

O'Driscoll and Evenett agree. O'Driscoll, for instance, stresses that tax reductions mean that businesses and the wealthy will stimulate the economy in a meaningful way.

"It's how jobs are created in a capitalist economy. If firms are going to earn more -- expect to earn more profits as they expect the after-tax rate of return to increase, they make investments and create jobs. That's how this economy works."

Evenett agrees, but he stresses that the tax cut must be retroactive.

"Only if they accelerate this tax cut will there be any appreciable benefit in this year or next year."

Some observers have accused Bush of making a self-fulfilling prophecy. They say that as long ago as December -- after he was elected president, but a month before he was inaugurated -- he was calling attention to what he called "warning signs on the horizon" that the U.S. economy was slowing down. Given Bush's stature, his words may have helped create America's current economic trouble.

Evenett concedes that Bush's statements were "extremely unusual," but hardly self-fulfilling.

"The downturn in manufacturing had already started before these statements were made. I think the elements of the -- the ingredients of the downturn were already there before President Bush started talking about the state of the economy."

Evenett says the Bush administration is very deliberate in what it says and does. The president has been promoting tax reduction since he began campaigning for the office. The economist concludes that the president and his advisers are merely taking advantage of a situation that can improve the chances of realizing their agenda in a way that can help the economy, too.