End budget obesity

Larry Kudlow
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Posted: Mar 23, 2006 12:05 AM

If the polls are telling us things are so bad, why is the stock market telling us things are so good?

Opinion poll after opinion poll reveals just how unhappy people are with President Bush, the economy, the war in Iraq and the general direction of America. At the same time, broad stock averages are hitting five-year highs. So who should you trust -- forward-looking stock markets or backward-looking polls?

Here's my answer: I have long believed that stocks are the best barometer of this nation's economic health and wealth, as well as the status of our national defense that is so necessary to sustaining freedom.

There's good reason why the New York Stock Exchange (about 2,500 stocks), the Transportation Index and the small-cap Russell 2000 are at their all-time peaks. New inflation reports show diminished price pressures, lower tax rates have boosted business, the Fed is nearly done tightening, job-creating profits are surging, consumers are spending, and former rust-belt manufacturing industries are enjoying their best run in 20 years, as they participate in the growing global economy.

The rising stock market may also be telling us that the world picture is not as bad as reported. First, the U.S. military is learning to cope with the counterinsurgency in Iraq, while it hands off more and more responsibility to the Iraqi security forces. Second, large-scale troop withdrawals are on the way in the Mideast, while the bulk of the remaining U.S. forces will be repositioned on Iraq's outer borders. Third, we are about to open up talks with Iran concerning its mischief in Iraq. You can bet these talks will include the topic of nuclear weapons.

Importantly, today's strong stock market is also betting that investor tax-cut extensions for capital gains and dividends, the backbone of this recovery, will make it through Congress. "Paygo" legislation, which would force tax hikes to offset investor tax cuts, has been defeated. (I hold that a new Gramm-Rudman-like spending-limit approach would be much more fruitful.)

However, the big "if" in this optimistic stock market scenario is the GOP Congress. If Republicans cannot downsize the budget, tax cuts will be in jeopardy, while tax hikes may even become a threat. In the early skirmishing, the GOP Congress is flunking the budget-cutting test.

Last week, the Republican-led Senate stiff-armed President Bush's call for belt-tightening when it adopted a $2.8 trillion fiscal 2007 budget resolution -- an entitlement-filled package that is more than $16 billion higher than the president's request. The Senate snubbed even modest attempts to slow mandatory spending programs, which Bush had targeted for $65 billion in net savings over five years. Almost all of the proposed amendments sought to increase spending.

Republican budget architects are using gimmicks that violate all principles. Take, for instance, Arlen Specter's "advanced appropriations," in which the Pennsylvanian got an extra $7 billion for education and other programs. The senator's blatant disregard for any sort of budget discipline was summed up with his smug remark, "It's not 'sort of' a gimmick; it is a gimmick."

To make matters worse, when fiscally focused Republican senators like John Cornyn attempt to tighten Congress' belt, they're rebuffed. Cornyn proposed $10 billion in Medicare and Medicaid savings over five years. His amendment failed 43 to 57. The disheartened Texas senator was later quoted as saying, "No one is at the wheel, and I'm afraid the plane will crash all too soon." Sen. Jim DeMint's amendment to stop the budget raid on Social Security surpluses also lost.

Over in the House, the Mike Pence conservatives were even denied a vote for budget-cutting offsets to high-spending Katrina assistance.

GOP budget obesity is a huge problem -- and it's not just a tax threat. Politically, a big-spending GOP will demoralize its increasingly frustrated small-government conservative base. These are the folks who can carry the election in November. Without them, the GOP Congress will be sunk.

Do voters and taxpayers really want Harlem Democrat Charlie Rangel as chairman of the House Ways and Means Committee? Let's take a peak into the future: In the House, Rangel will ignite tax-hike legislation. Next door in the Senate, Democrat Ted Kennedy will look to raise the minimum wage. Trial lawyers will rule the roost in their battle to undermine business. Wacko left-wing attempts to censure or impeach President Bush will move to center stage. Cut-and-run will become our new defense policy.

There is a way out. End budget obesity. Republicans must understand that the old pork-barrel politics of buying elections doesn't work anymore. This is a center-right country that sees smaller government and lower taxes as the key to prosperity and economic freedom. The GOP must get back to this first principle. The Kyls, Cornyns, DeMints and Pences have the story right, while the liberal Specters of the party are completely wrong. Which GOP is going to triumph?