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All The Right Moves
Bush pivots toward a larger tax cut.


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Larry Kudlow

With stock markets still plunging, and the economic slump deepening with today’s report that the nation’s industrial production declined for the fifth consecutive month, a report circulating out of Washington that President Bush has shifted toward a larger tax cut with a more immediate reduction in personal tax rates is a hopeful sign.

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Senior White House sources confirm that these reports are true. Yesterday, Treasury Secretary Paul O’Neill met with a group of moderate Republicans and Democrats and told them that a House-passed tax bill was not stimulative enough in the early years. Chief economic advisor Larry Lindsey has acknowledged that a more aggressively retroactive tax cut would raise the static revenue price tag, but that is of no great concern to the administration.

White House insiders report that a very small, on-budget operating surplus in 2005 is worrying some House and Senate moderates who are afraid to hint at borrowing any of the Medicare surplus. But these same administration people recognize that earlier tax-rate relief will bring on economic recovery more quickly and, hence, the growth benefits of this approach will take care of future budget scorecards.

Bush is absolutely right to shift his strategy. As the economic story deteriorates, any good businessperson should be willing to make short-term adjustments in order to implement a long-term strategy. Somewhat like Bush’s shift against regulating carbon-dioxide emissions, his move to accelerate proposed tax-rate reductions is entirely appropriate as a short-term adjustment to bolster the long-run goal of maximum economic growth.

The basic policy compass is unchanged. But as any good bond trader will tell you, you have to react to the shifting market conditions.

Looney-left Democrats are criticizing Bush for bad mouthing the economy and thus bringing it down. But this argument is just as goofy and politically pathetic as their class warfare opposition to broad-based tax cuts. The fact is, from Alan Greenspan on down, virtually every economist on the planet recognizes that the economy is not growing and the risk of recession is rising above 50%. Bush’s honest appraisal is likely to be welcomed by a population sick and tired of presidents lying to them.

But Bush, of course, must recognize certain political realities that go well beyond his short-term economic forecast. Mainly, it will be Bill Clinton’s recession — ably assisted by Alan Greenspan’s over-tight Fed policies — for the duration of the president’s first year in office. But by 2002, it will become Bush’s recession, unless appropriate fiscal and monetary actions are taken.

Ronald Reagan learned this 20 years ago. As the Carter recession of 1981 stretched into 1982, Reagan lamented the gradual phase-in of his 25% marginal tax-rate cut. Even more, Paul Volker’s inflation-slaying overstayed the course with prolonged tight money. Consequently, the GOP lost 25 House seats in the 1982 midterm election.

Karl Rove and other Bush political advisors are undoubtedly reminding the president of these potential pitfalls. Therefore, expanding the $1.6 trillion tax cut — which was a bogus benchmark anyway — is a good idea. Hopefully the Bush administration will look favorably on various congressional efforts to include pro-growth measures such as cap-gains tax relief and expanded super-saver IRA and 401 (k) plans. These will enhance the capital formation impact of the tax cuts.

Meanwhile, on the speech-making stump, the president is also shifting his communications message towards economic recovery. This is exactly right. Setting moral limits to big government, and its tax burdens, is all well and good. But in terms of kitchen-table impact, both Main Street denizens and investment portfolio holders everywhere know in their gut that tax cuts are the right antidote for economic downturns. Nothing fancy, just plain common sense logic.

Whiners inside the Beltway may complain that Bush is changing his stripes. Well, there’s nothing wrong with a bit of presidential change as long as the change is pointed in the right direction.

What we’ve got here is not so much significant policy change, as a very appropriate, late-winter tactical pivot. The nasty stock-market decline is a cry for help. Bush’s pivot shows that fresh help is on the way.



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