Clarified points

Although it isn’t an easy task to separate the contributions of the parties involved in an interview, Mr. Slupski is to be commended for tackling so many problems in such a short space on Oct. 29 in the Star. However, I would like to correct/clarify some points in the paper:

1. The National Bureau of Economic Research provides us with a list of 26 series of leading economic indicators of which a short list of 12 series is frequently used as a barometer of economic activity ranging from average weekly hours of manufacturing production workers to consumer credit outstanding.

It is important to note no single series has had full predictive power in identifying upturn/downturn in economic activity on a regular basis.

A more accepted view is to follow the time behavior of the composite index of the 12 leading economic indicators. If the composite index points downward three times in succession the probability of a recession is greatly increased.

2. The gulf crisis indeed has accelerated the softness of the economy. Since the economy is heavily energy based, higher oil prices lead to higher inflation, lower purchasing power, lower profit and higher unemployment.

Even without the gulf crisis the gigantic budget deficits of $146 to over $200 billion annually since 1982 have produced discouragingly high interest rates that have hurt many sectors of the economy.

Although the high interest rates have attracted foreign capital, this cannot be counted on in perpetuity. It is very likely the recent weakness of the dollar may be an early warning of the diminishing inflow of foreign capital.

3. The compromised bill, passed by Congress and expected to be signed by the president, is incapable of solving the budget deficit problem.

The predicted budget deficit under this bill is still over $200 billion for the year. What needs to be done is to get the national priorities addressed on a non-partisan basis.

It is not feasible to have lower taxes, higher defense spending and lower deficit at the same time.

There is not enough meat left in the entitlement programs to be cut; reduction in defense spending due to “peace dividend,” raising income tax brackets a couple of notches, to about 40 percent, and reducing capital gain taxes may be the only viable long term solution to the deficit predicament.

Khan A. Mohabbat

Professor of Economics