Economic policy gone adrift

Larry Kudlow
Posted: Oct 22, 2005 12:05 AM
President George W. Bush is having a bad October -- and so is the stock market. The two are not unrelated.

Bush calls it “background noise,” but it’s a lot louder than that. Potential criminal charges in the CIA-leak case, a Supreme Court nomination gone awry, hurricane relief over-spending, and investigations of the Republican leaders of the House and Senate all threaten to derail both the president’s political standing and his policy agenda. Not even the successful Supreme Court confirmation of John Roberts and the strong Iraqi vote to ratify a freedom-and-democracy based constitution have been enough to take the heat off Bush.

A sagging stock market knows that all’s not right in Washington. Even worse, it knows that the president’s once solid economic-policy vision is drifting off-course.

A significant congressional debate is now brewing over taxes and spending. House Republicans such as Mike Pence, Jeff Flake, and Marsha Blackburn are putting together an expanded budget package for mandatory spending cuts and a 3 percent across-the-board discretionary sequester that could net $600 billion in 10-year savings estimates. Meanwhile, over in the Senate, Republican Tom Coburn valiantly tried to halt the pork-barrel funding of Alaska’s “bridge to nowhere.” These are important developments, but the president and his top economic managers seem to be offering no encouragement.

For instance, Josh Bolton, the director of the Office of Management and Budget, has said nothing publicly about the necessary renewal of spending restraint. Only a month ago, he promised to deliver, in a few weeks time, a new list of White House-sponsored budget cuts and perhaps even a rescission package. But the period elapsed without any new ideas coming out of the administration.

This silence from the top is deafening.

When a recent CNBC poll asked which party was worse on pork-barrel spending, Republicans earned profligacy honors by a margin of 14 points -- 57 percent to 43 percent. This result shows that the investor class may understand politics better than the professionals in the West Wing -- they know that in today’s setting, pro-growth tax-cut extensions on capital gains and dividends will never make it through without a strong budget-cutting package. If the investor class deserts the GOP in next year’s midterm elections, Republicans will be crushed and the Congress could change hands.

Even though the supply-side tax cuts of 2003 triggered an economy strong enough to absorb Gulf Coast hurricane damages, and have paid for themselves with a 32 percent ($78 billion) tax-revenue increase in fiscal year 2005, Democrats are calling for a deal that would repeal those tax cuts in return for minimal budget restraint. House Democratic leader Nancy Pelosi calls the new GOP budget package “another rip-off of the middle class to give tax cuts to the high end.” So class warfare is alive and well.

Democratic whip Steny Hoyer wants a 1993-type tax-hike deal that (along with the Clinton attempt to nationalize healthcare) cost the Democrats control of both houses for the first time in 40 years. But now it’s Bush who should beware. He can’t forget that his father relinquished a second term when he signed on to the infamous Andrew’s Air Force Base deal for large tax hikes and small spending cuts.

By not campaigning for tax-cut extensions, an omission that has chilled the stock market, and by not supporting tough budget-cutting proposals, the president could be trapping himself into another fateful compromise. Pro-growth, first-principle policies of tax cuts and budget restraint are the hallmarks of Republican political victories. Has the White House forgotten this, or has the “background noise” cat got its tongue?

A batch of good tax-reform ideas from former Sen. Connie Mack has also gone unnoticed by the president and his men. While Mack’s group, which was commissioned by the president, didn’t go far enough toward a flat-tax reform of the income-tax system, it has suggested a number of excellent ideas, such as: abolishing the dividend tax, slashing corporate tax rates, moving to the full cash expensing of business depreciation write-offs for the purchase of new plants and equipment, ending the worldwide taxation of U.S. corporate profits, greatly expanding savings accounts, and abolishing the alternative minimum tax. These proposals could form an optimistic starting point for a full-fledged pro-growth tax-reform debate. But they’ll go nowhere if the White House doesn’t take the lead.

It’s not too late for the president to avoid a shipwreck second term. Nor is it too late for the Republican government in Washington to reestablish a far-reaching policy vision for economic growth. Democratic strategist Bill Galston recently published a memo warning Democrats that “a liberal, anti-war, welfare state, soak the rich liberalism doesn’t sell anymore.” Yet that’s what Democrats are still selling. If Bush has a better product, now’s the time for him to roll out a first-rate merchandising effort.