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Tuesday, August 28, 2001
Larry Kudlow :: Townhall.com Columnist
Don't blame Bush
by Larry Kudlow
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Washington politicians are shocked -- shocked -- that federal budget surpluses are dwindling as the national economic downturn lengthens. Democrats are pointing fingers at the White House. South Carolina Democrat John Spratt even blames Bush for violating "a sacred trust" that he allegedly inherited from the Clinton administration. A sacred trust? Nonsense. What Bush inherited from Clinton was a big economic turkey without any stuffing: the worst bear-market decline in two-and-a-half decades, and the first synchronous global slump since the mid-1970s. Before the Texan was even sworn into office, the Nasdaq technology index had already plunged 70 percent. By the time Bush submitted his tax-cutting budget, the U.S. economy had rolled over to less than 1 percent growth from 8 percent in late 1999. Before the tax cuts were even passed into law, the domestic private-sector economy (excluding trade and government spending) had shrunk two consecutive quarters. No one should blame George W. Bush for the Federal Reserve's scorched-earth deflation of the stock market, manufacturing and technology investment -- a deflation that is still in process despite the central bank's jamming down of the monetary accelerator this year after slamming on the brakes last year. Nor should serious people blame Bush for Clinton's government-surplus obsession that drained hundreds of billions in personal tax dollars from the private economy, and led to a record post-war tax level that reached nearly 21 percent of GDP. Nor should Bush be blamed for Clinton's overzealous regulatory burdens, where a spate of midnight executive orders penalized businesses and prevented energy production. More than a year ago, it was the Clinton Justice Department's decision to break up Microsoft that ignited the tech-sector debacle. Clinton officials at the FTC blocked the rollout of broadband connections to the Internet by favoring Baby Bells over local phone companies, and stopped the capital spending expansion plans for AT&T, WorldCom and JDS Uniphase. In short, it was the Clinton policy of monetary deflation, high taxes and regulatory excesses that stopped the long prosperity cycle. That is George Bush's inheritance. No honest Keynesian can deny that cyclical budget deficits are the norm during recession. But if Democrats want to claim the Depression-era mantel of Herbert Hoover by raising taxes to preserve budget surpluses, then Bush should make this a political opportunity. He should loudly explain how austerity-minded policies will deepen and prolong the slump. He should make it clear that economic growth causes surpluses, not the other way around. He should state that the best way to protect Social Security and Medicare -- and to advance much needed reforms -- is to return to a booming economy that will unleash tax revenues. The main flaw in Bush's economic strategy is the absence of tax cuts to directly stimulate investment and business. Rather than a consumer-led downturn, the economic decline stems from the stock market blowup and a related falling-off-the-cliff of business spending. Capital expenditures have dried up, as capacity utilization in technology has plunged to 65 percent from 90 percent. Shell-shocked investors are completely gun shy about recommitting their capital. Risk-free money-market funds are overflowing with idle cash. Bush's latest budget update reflects a private forecasting consensus sub-standard economic recovery rate of only 3.1 percent over the next year, and some are beginning to doubt even that. In the past 30 years, average first-year growth recoveries have been closer to 4.5 percent . That is why the administration should propose lower capital-gains taxes, reduced corporate tax rates, and accelerated depreciation allowances for business-equipment purchases. These measures would directly address the current economic weakness by reducing tax costs and raising investment returns on business assets and equity values. Treasury Secretary Paul O'Neill recently ruled out cap-gains relief as unaffordable. But this is factually incorrect, and politically mistaken. Slicing capital-gains taxes is always self-financing and then some. Meanwhile, lower business taxes will promote enough additional job creation and growth to pay for the cuts within five years. The Bushies have work to do. They need to quickly settle the Microsoft case and forcefully support an extension of the Internet-tax moratorium. Trade protection measures such as the recent actions on steel and lumber should be ruled out. The president should also make it clear he will veto any and all tax-hike proposals, and he should push forcefully to make his income-tax cuts permanent. Leave it to the Democrats to oppose pro-growth tax cuts. Let the Donkey party defend recessionary budget surpluses and government-enlarging tax hikes. Today's America is a private-sector, investor class, ownership-oriented society that will vote its pocket books and portfolios come November 2002.
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Lawrence Kudlow is host of CNBC's Kudlow & Company

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