Relief with a Vision

Larry Kudlow
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Posted: Sep 30, 2005 6:18 PM
During this hurricane season of George W. Bush’s political discontent, the president has been slammed almost uniformly by pundits on the left and the right. Some criticisms about the administration’s late reaction to Katrina, and FEMA’s inadequacies in a crisis, are justified. But critics, especially in the conservative ranks, are missing two crucial messages being sent by the president -- messages that could endure long after the names Katrina and Rita are just names again.

Bush knows, even if others have forgotten, that the terrorists are carefully watching the U.S. government’s response to the natural disasters in New Orleans, Houston, and elsewhere. Hurricanes are one thing, but a terrorist attack with biochemical weapons or a nuclear weapon would be far more devastating. Even another 9/11-type bombing episode from the air, ground, or sea could present more of a challenge than what we now face in the Gulf Coast. Bush knows this. He knows that the U.S. must rebuild the Gulf no matter what it takes because this effort might be a test run for something far worse.

Is $200 billion too high a price to pay to send a message to our terrorist enemies? I doubt it. This is something our $13 trillion economy can easily shoulder. (Although a federal emergency control board should be appointed to monitor the taxpayer monies headed for the political swamp of New Orleans.) Yes, the budget deficit will rise for a year or two, from roughly 2.5 percent of GDP to perhaps something over 4 percent. Big deal. The very bond markets that actually do the financing have shrugged the spending off, with Treasury issues continuing to trade around 4.25 percent. There was no “spiking up” of long-run interest rates that might suggest a financial crisis. The stock markets, meanwhile, just registered their best third quarter in seven years.

In this new spending environment, total U.S. debt held in public hands will rise a little more quickly to the $4 trillion mark. But that’s a small fraction of our nation’s wealth. The Federal Reserve recently indicated that total family net wealth -- which includes the value of our nation’s businesses, bonds, stocks, and real estate -- just hit an all-time high of $50 trillion. This illustrates the firepower of the free nation and economy that the radical Islamic fundamentalists desire to overthrow.

Bankers often talk about debt-to-equity ratios when it comes to financing corporate deals. Well, our federal-debt-to-national-wealth ratio is a paltry 8 percent -- a metric that would make any M&A specialist gleeful. Of all the commentary I’ve seen about the so-called fiscal crisis of hurricane-recovery spending, only Nick Danger of the RedState blog has had the sense to argue the issue like a banker. Global financing markets will underwrite new U.S. spending without a drop of perspiration.

If the Republican party intends to keep the flame of lower taxing and spending, it should adopt the kind of across-the-board spending cuts on non-security and non-entitlement accounts being proposed by congressional conservatives like Mike Pence, Jeff Flake, and Marsha Blackburn in the House, or Tom Coburn, Jim DeMint, and Jeff Sessions in the Senate. Of course, Republicans on Capitol Hill should have been making this case before Katrina. But if they’re going to fight for budget responsibility now, they must do so while preserving the economic-recovery-igniting tax cuts on personal income, investor dividends, and capital gains.

No matter what it takes.

A second crucial message that most conservative critics are missing has to do with free-enterprise and ownership in the post-Katrina/Rita world. Along with emergency funds for victim-relief and infrastructure rebuilding (the latter of which is mandated by law), the president is proposing a free-enterprise, anti-poverty program to deal with the long-term decline of New Orleans. Bush has adopted this from Jack Kemp, whose idea for zones of lower taxation and regulation in the Gulf will incentivize private capital formation and put businesses in the recovery driver’s seat.

Bush is also restating his vision for an ownership society in the form of a homesteading program for middle- and lower-income hurricane victims. Mingled with this is his theme of personal responsibility, whereby vouchers for education, employment, and health care will give choice and access to those who most need it. Rather than creating a new New Deal, which would cater to the failed welfare state of New Orleans, Bush is proposing a conservative vision that can be copied in blighted urban areas nationwide.

These are far-reaching reforms that will be vastly more important and more enduring than the temporary financial-assistance plans that have so occupied the musings of conservative think-tankers.

It may be many years before Bush is given credit for waging war against both radical Islamic terrorists and welfarist anti-poverty programs. But he is smarter than the punditocracy thinks. And his long-run vision for the health, security, and welfare of this country is far grander than most of his critics could ever dream possible.