October 22, 2005
Economic Policy Gone Adrift
By Lawrence
Kudlow
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.
Lawrence
Kudlow is a former Reagan economic advisor, a syndicated columnist,
and the co-host of CNBC's Kudlow
& Company. Visit
his blog, Kudlow's Money
Politics.
