When he fired Secretary Paul O'Neill and chief economic adviser Larry Lindsey last week, President George W. Bush once again demonstrated that he is not afraid to make the tough and bold choices. When he chose John Snow as O'Neill's replacement, the president revealed how firm a grasp he has on the type of person required to move the economic-growth agenda forward.
Snow, who served with me when I chaired the National Commission on Economic Growth and Tax Reform, is a terrific guy. He was a strong voice on the Tax Reform Commission and is totally committed to the commission's conclusion that it is time to replace the failed tax system with a new simplified tax code that taxes income only once at a much lower rate on both labor and capital. He understands how corrupting and confusing the current tax system is and how it brings out the ethical worst in people and large businesses. That is why he has long been a leader in the forefront of raising ethical standards of corporate governance.
Bush will send an economic growth package to Congress next year that comports with the principles laid down by the Tax Reform Commission. Having Snow lead the economic team means the administration will hit the ground running when Congress reconvenes.
The president's "growth and jobs" tax package reportedly will consist of partial implementation of four of the five easy pieces of tax reform I discussed in this column last week: acceleration into 2003 some of the income tax rate reductions planned for 2004, a reduction in the double taxation of corporate dividends, additional tax write-offs for business investment in plants and equipment, and higher limits on annual contributions to retirement accounts, such as 401(k)s and Individual Retirement Accounts.
Snow has a vision of what a comprehensively reformed tax code should look like, but he is also a realist. He understands that given current political realities, the president is correct to pursue tax reform gradually and incrementally -- but not too incrementally.
One way he can immediately contribute to the president's plan and help guarantee that the gradual, incremental reforms are sustained and transformed eventually into comprehensive reform is to convince the president to add one more small but critically important piece to his package: Enterprise Zones of Choice. Allowing states and territories to designate economically troubled and trade-impacted areas as enterprise zones, in which a comprehensive list of tax reforms could be implemented in whole and immediately, would generate momentum for the incremental beginnings of tax reform to evolve into a comprehensive transformation of the system.
My great enthusiasm for Snow is only somewhat dampened by a concern that Lindsey's reported replacement, Stephen Friedman, is a "deficit hawk" closely associated with the Concord Coalition. Some administration officials pooh-pooh this concern by contending that Friedman's role will be primarily to communicate policy, not make it. In my opinion, it is unrealistic in the extreme to expect the president's No. 2 economic adviser to be effective on Wall Street, on Main Street and with the Congress if he does not thoroughly believe in and have a personal investment in the policies he is attempting to sell.
O'Neill's problem was not that he couldn't sell the policies he helped devise and believed in; it was that he didn't personally believe in or have much of a hand in creating many of the policies he was supposed to be selling. Snow, on the other hand, believes in growth economics to the marrow of his bones. It would be a shame to saddle him at the get-go with a No. 2 who does not share that profound conviction.
Every member of the economic team must understand that budget deficits are the result of slow economic growth, not its cause. They must convincingly articulate how raising tax rates will only slow growth and produce larger deficits, that the only way to get the deficit down is to get economic growth up and that the only way to raise economic growth is through sound tax policies complemented with a price-stable monetary policy and a rapid acceleration of Trade Representative Robert Zoellick's effort to move toward a tariff-free world.
The new Bush economic team must explain to Congress and the American people with unshakable conviction that we need to lower tax rates and reform tax policies that discourage work, penalize saving, stunt investment and undermine entrepreneurial risk-taking, even if that means budget deficits may get worse before they get better. Every member of the economic team must radiate a sincere belief that lower tax rates mean higher growth rates, and higher growth rates mean higher revenues, lower deficits and, eventually, larger surpluses.
Businesses incur debt all the time to replace worn-out and obsolete equipment with new, state-of-the-art equipment that increases productivity and raises the firm's long-run earnings potential. History also demonstrates that short-term budget deficits are well worth the price if they are merely the temporary consequence of replacing economically unsound tax policies with sound policies that lead to higher long-run growth. That's a message Wall Street and Main Street both will understand and welcome, and that's the message the new economic team must be committed to communicating.