The sagging stock market is diverging significantly from the
rising economy. It's a puzzling and very unusual event. Much of this
disconnect can be traced to a loss of investor trust due to corporate
corruption and the breakdown of accounting standards. Worries about domestic
terrorist bombings are also weighing down Wall Street.
But there's more to it than that. Anti-growth policy mistakes by
the Bush administration could be curbing investor appetites for longer-run
Recently, the administration's economic message has dramatically
shifted away from the Reaganesque, free-market, free-trade, supply-side
policy direction that George W. Bush touted during the 2000 campaign and
last year -- when his broad-based tax-cut package was enacted into law, and
hemispheric and global free trade were passionately supported. Instead of
continuing with this winning formula, Bush has gone protectionist and
regulatory. This shift is handcuffing investors.
In the name of political expediency, Bush is starting to sound
more like Richard Nixon than Ronald Reagan. To win the 1972 election, Nixon
gunned the money supply, imposed wage, price and energy controls, and set
down a number of trade-import restraints. All this created inflationary
recession -- or stagflation -- which blew up the economy and the Republican
Party, and culminated in the election of a left-wing Democratic Congress in
1974. So much for short-run political expediency. It didn't work for Nixon.
It won't work for Bush.
Consider this: The end of the post-Sept. 11 stock-market rally
can be traced to March of this year. Since then, stock averages have slumped
badly. It is no coincidence that a 30 percent steel tariff administered by
the White House occurred that very same month, right at the market peak,
marking the end of the stock market's war recovery.
Of course, the administration assured us that the tariff measure
would have no palpable economic effect. But the exact reverse has occurred.
Steel-price increases have ranged between 20 percent and 70 percent,
covering a wide variety of steel-using industries, including old-economy
manufacturers that would be responsible for a good amount of investment in
the recovery. Sure, new Bush laws to lower tax rates on businesses are in
effect. But the hike in the cost to make steel may be offsetting the
positive results of any business tax cuts.
More, a new tax war between the United States and Europe may be
coming on the heels of a threatened trade war over the steel issue. The
Treasury Department and Republican Ways and Means Chair Bill Thomas are
pushing to raise taxes on foreign-owned companies operating in the United
States. This of course would repel foreign companies from operating here,
and that's a significant negative for the growth of our economy.
Tax-policy officials are also moving to prevent American
companies from reincorporating in low-tax havens such as Bermuda and
Barbados. No one likes to see American firms relocate. But several companies
are trying to reduce their overall tax costs in order to pass on higher
after-tax profits to shareholders. That's not a lack of patriotism. It's a
complaint against burdensome American business taxes. And there's a lot to
Of the 30 industrial-country members of the Organization for
Economic Cooperation and Development (OECD), the United States ranks (SET
from the top, with one of the world's heaviest
corporate tax burdens. Even more, as conservatives sweep to victory in
European elections, every center-right leader is talking about
across-the-board tax cuts. If these cuts are implemented, the United States
will fall even further behind in the highly competitive global race for
Misguided U.S. policies on taxes and trade -- which have also
produced a slumping dollar -- are two reasons why foreign investment-flows
into the United States have nearly come to a halt. But there are even more
anti-growth policies coming from Washington.
Consumers overwhelmingly support Microsoft in its long-running
anti-trust case. But the government -- via the Justice Department -- may
desert America's leading software maker, and approve stifling sanctions
desired by a handful of aggressive states. The DOJ is also launching a
criminal inquiry into semiconductor makers for alleged collusion to prop up
prices, even though the temporary rise in chip prices earlier this year has
already been erased. Chip prices have dropped roughly 25 percent yearly for
a half-dozen years. And the DOJ is taking on this deflating yet vital
sector? That's economic illiteracy.
With so many anti-growth trade, tax and regulatory threats in
the air, stock markets are stuck in a funk. The president appears to have
lost his economic compass and would do well to return to the Gipper's sound
plan for domestic growth. Stock averages hated Richard Nixon but adored
Ronald Reagan. Surely there's a lesson in this.