Enter Shadegg, and Hope

Larry Kudlow
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Posted: Jan 13, 2006 9:05 AM
The race for House majority leader now has a third horse: Arizona’s John Shadegg. Prior to this development, the two-horse race between Missouri’s Roy Blunt and Ohio’s John Boehner had few conservatives excited, although Boehner had been looking like the better bet over Blunt, who has been tied to the seedy, backroom dealings of convicted lobbyist Jack Abramoff. Blunt is the last thing Republicans need right now, while Shadegg offers a clear path to returning the GOP to the first principles of lower spending and ethical governance.

Hopefully Shadegg, who is not part of the Abramoff lobbying culture, will run on the budget-cutting proposals of the Republican Study Committee, in particular the RSC plan to end midnight “earmarks,” which stealthily insert pork into bills without debate. These earmarks are not only budget-busters, they open the door to rogue lobbying where legislative favors are traded for cash. If the 100-member RSC gets behind Shadegg, they could win in come-from-behind fashion. This rebel group is full of change agents, people like Mike Pence, Jeff Flake, Paul Ryan, Marsha Blackburn, and Jeb Hensarling -- rising young stars in the GOP firmament. This crowd, of which Shadegg is longtime member, stands on bedrock conservative principles. They all deserve seats at the leadership table of high Republican policymaking.

Thursday’s announcement by the Bush administration of an expected $400 billion deficit for fiscal 2006 again shows why budget-cutting in the RSC mode is necessary. Last year, about $27 billion in earmarks made it into appropriations bills, while another roughly $25 billion in earmarks was attached to the highway transportation bill alone. But pork can be found everywhere. There are a couple hundred billion dollars in farm and corporate-welfare subsidies that can easily be scrapped. Coupling this with lower tax rates on corporations, as recently suggested by Washington economist Kevin Hassett, makes good pro-growth deficit-cutting sense. But an across-the-board cut of all manner of pork is of first order for this Congress.

In the near term, if business-as-usual budgeting does not come to an end, the investment tax-cut extensions on dividends and capital gains will not pass. Dow 11,000, reached just this past week, is an important symbolic benchmark of the benefits of higher after-tax investor rewards. The day those tax cuts passed the Senate in May 2003, the Dow Jones average stood at just 8,601, according to Phil Kerpen of the Free Enterprise Fund. The bull market since then has created an extraordinary $5 trillion of new shareholder wealth. Meanwhile, 2005 marked the third straight year of strong dividend activity, where dividend increases by publicly held corporations were 74 percent higher than 2002 levels, according to Dan Clifton of the American Shareholders Association.

Ironically, the Treasury Department has reported the first budget surplus for the month of December in three years, as corporate tax payments hit an all-time high. Total tax receipts were up 12 percent while government spending rose 5.6 percent. Of course, this is good. The Laffer curve is working. At lower tax rates, stronger economic growth is creating higher tax-revenue surprises.

But Wall Street economist Michael Darda reports that federal spending increased 8.1 percent during the last twelve months. Since 2001, the budget has expanded 6.6 percent per year compared with only 3.1 percent growth during the 1993-2000 Clinton years. Though supply-side revenues reduced last year’s budget deficit by about $100 billion -- moving it down toward $300 billion, or roughly 2.5 percent of GDP -- a return to a $400 billion deficit in 2006 as suggested by the White House will be political poison for tax-cut extensions.

Key senators have told me that the Upper Body does not have the votes to lock up this critical pro-growth legislation. And that was before the White House advertised the $400 billion deficit estimate. At both ends of Pennsylvania Avenue, the governing Republicans must show taxpayers and voters that budgeting-as-usual will be stood for no more.

I have little doubt that if John Shadegg becomes House majority leader that this untenable situation will begin to turn around. At the very least, his run for the post becomes a symbol of GOP efforts to grow the economy and end corrupt big-government budget practices with a complete reversal of policy.

These party caucus elections are usually inside-baseball affairs that escape widespread public notice. But given the Abramoff scandal, the continued overspending by Congress, the sad new budget estimates, and the failure of legislators to renew supply-side tax-cut rewards for capital formation and jobs growth, Mr. Shadegg’s campaign becomes a very public affair -- a manifestation of the GOP’s last chance before the mid-term elections to show the public that reform is possible.

Without speedy and significant reform, it will be very difficult for Republicans to restore taxpayer confidence in their ability to govern.