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The Growth Wedge
Bush must deepen and widen his wedge between Clinton and Gore.


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Larry Kudlow

In the pivotal debates, which could well decide the outcome of this laser-thin election, there’s one unifying theme that will serve George Bush well: economic growth. In virtually every policy debate between Bush and Gore, the big difference in philosophy and program is growth. George Bush’s free-enterprise based ideas of lower tax rates and consumer choice, and market-competition solutions for health care, education, Social Security retirement, and energy, are all proposals that will enhance future growth.

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Wall Street Journal editor Robert Bartley was exactly right in his column this morning where he argued that Bush stands for individual empowerment and Gore for government paternalism. In the new information economy, paternalism is a relic of the past, while empowerment is the wave of the future. But the logical outcome of Bartley’s argument is the ultimate impact on future growth and prosperity.

In recent weeks, polls have shown that future economic prosperity has become the number-one issue for voters — even trumping education. The Texas governor has started driving a wedge between Clinton and Gore on the issue of growth, essentially arguing that Clinton’s New Democrat thinking was pro-growth, while Gore’s regulator-in-chief, entitlement-spender thinking is anti-growth Old Democrat.

During the debates, Bush must deepen and widen this wedge between Clinton and Gore. On issue after issue, the Texan must connect the dots between his programs and future economic prosperity.

Take energy for example — which has become a hot topic following the latest OPEC price hikes. Al Gore’s approach is to lower U.S. energy use and our standard of living. From his book Earth in the Balance right through to his enthusiastic support of the Kyoto treaty, Gore would promote a Jimmy Carter-like maze of government-run regulations, mandates, controls, and targets to limit energy production and consumption — in other words, to limit growth.

Bush, on the other hand, would choose consumers over caribous in Alaska’s Arctic National Wildlife Refuge, putting a measly 8 percent of the area in play in order to pump out tons of additional oil and gas to serve the growing interests of business and consumers. The contrast couldn’t be clearer.

Even the mainstream, non-supply-side WEFA economic forecasting model shows that the Kyoto agreement would reduce U.S. growth by 1 percentage point per year. U.S. Energy Department studies have come up with the same results.

Bush must hold Gore responsible for his anti-business rhetoric on the campaign trail. You can’t be in favor of jobs and be against the businesses that create jobs. You can’t be in favor of life-saving drugs and be against the drug makers. You can’t have energy to fuel the economy without energy producers. You can’t have prosperity without generating a new class of successful entrepreneurs — sometimes called rich people.

Today’s front-page story in the New York Times notes that Bush is again making tax cuts the centerpiece of his campaign. This is a very good thing, and makes one hopeful that the Texan will unflinchingly defend his Reaganesque marginal tax-rate reduction during the debates.

Sure, sure, it’s fine to note that Bush gives disproportionately large percentage cuts to the middle class, and that his tax plan helps everyone and hurts no one. Gore, on the other hand, would deny tax cuts to at least 50 million people — nearly half the tax-paying population. But let’s not forget that the full thrust of broad-based tax relief is always aimed at economic growth.

From John Maynard Keynes right on through Arthur Laffer, the purpose of tax cuts is to grow the economy to its fullest potential. Budget surpluses do not create growth. It is growth that solved the old budget-deficit problem. Al Gore and his advisors, such as former Treasury Secretary Robert Rubin, continually mistake cause and effect. A free economy requires incentives and rewards for risk taking, production, and investment. Higher after-tax returns, whenever and wherever applied, always generate faster growth and higher revenues.

The first debate is in Boston, nearby the Kennedy School of Government. This would be a great opportunity for Bush to cite the JFK tax-rate reduction plan that drove tremendous growth and revenues until Richard Nixon debauched the dollar and threw the economy into inflationary recession.

Governor Bush should not rely on the narrow Lawrence Lindsey argument that tax cuts would provide insurance against the next recession. Instead, Bush should argue forcefully that marginal rate relief will expand the economy’s potential to grow, doubling the size of the gross domestic product in 16 years, creating millions of additional jobs that will throw off Social Security solving revenues in the process. Lower tax rates today will substantially raise tomorrow’s capital investment and productivity, thereby making two workers tomorrow as productive as three workers today.

All of this paves the way for a smooth and low-cost transition to private investment accounts.

Rich people? Bush should not be afraid to say that rich people are part of our economic miracle. At Reagan’s lower tax rates, the top 1% of tax payers threw off 25% of total revenues. Then, with a reduction in the capital-gains tax in the mid ’90s, the top 1% now throw off 33% of total revenues, with the top 5% generating more than half of all tax collections. The top 10%, with an average income of $79,000 or higher, account for 63% of revenues.

Bush should remind debate viewers that the wealthiest people don’t really need tax cuts. But they are also the economic activists who provide the seed corn and new venture capital for the technology startups that keep the Internet economy moving at the speed of light. Over 80% of the more than 40 million new jobs created in the past two decades come from brand new business startups. Lower income people receive job opportunities from the investment prowess of upper income people. That’s the way the system works. When Al Gore bashes rich people he is bashing that system, and when he bashes that system he is bashing current and future American prosperity.

Bush should make it clear to the 50 million or more people watching the debate that he understands the free-enterprise source of growth and prosperity — and that Al Gore does not. Indeed, the marvelous growth and prosperity of the last 18 years resulted from the triumph of free-market competition and choice, and the decline of government fine tuning.

Spending, regulating, reducing energy use, and national takeovers of health and education are not the answer. Whether in the name of fiscal conservatism or not, Al Gore’s entire political premise depends on the triumph of government, a reversal of the progress of the last decades of the 20th century. It is Gore who will stifle the animal spirits of prosperity.

Health care competition is a growth solution. Individually owned Social Security accounts are a growth solution. Wherever markets rule, and self-governing individuals decide about resource allocation, growth follows. If George Bush can make it clear that he has a growth solution for the remaining problems of our society, then he will win the debates and the election.



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