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Patriotism Is Profitable
. . . and freedom will prevail.


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Larry Kudlow

Should America buy stocks when the market reopens on Monday? Absolutely. In a New York second. They should invest in the long-term future of America’s freedom and democracy, and in its golden, long-run track record of entrepreneurship and wealth creation.

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For starters, we should buy for patriotic reasons. After Pearl Harbor, the country bought war bonds on a grand scale to finance military buildup. Today, we must summon the patriotism to buy stocks, to finance economic recovery, and to show the world that the U.S. is strong and standing tall.

Think of this: If millions of Americans each buy 100 shares of their favorite stock or investment fund on Monday, the winners will easily beat the losers at the closing bell. For all those around the country who want to help the families of the victims, help rebuild the economy, and help in the war against despicable terrorism, buying shares would be an incredibly positive step.

That said, buying the stock market reflects more than just patriotic fervor. It reflects good, common investment sense. Because America is the freest and most enterprising economy in the world, investing in it has always paid off.

Through ten recessions and ten bear markets since World War II, the S&P 500 stock index has produced a superior total return of 13% at an annual rate, or 9% after inflation. According to University of Pennsylvania professor Jeremy Siegel, U.S. stock-market returns have compounded by an average growth of 7% yearly, adjusted for inflation, since 1802. True, as pessimistic experts keep telling us, today’s economy is in recession. But that’s the trouble with the experts. They lack confidence in the wisdom that political and economic freedoms always produce positive results and enduring solutions over the long haul.

In postwar U.S., recessions on average have tended to last about a year, while recovery cycles have lasted over five years. In the past two decades of the information economy, recessions were typically a year long while recoveries spanned nine years. Even through nine postwar recessions (we’re probably in the tenth), the U.S. economy has expanded at a remarkably successful 3.5% annual growth rate after inflation. Investors be assured, the sun will shine again.

Looking ahead, traditional prosperity killers such as high inflation, rising tax rates, overbearing government regulation, and commerce-stopping trade protectionism are nowhere in sight. Indeed, the war against terrorism is producing a sea change in federal economic policies that will better promote recovery through more stimulative fiscal and monetary actions.

Facing both war and recession, President Bush and a more bipartisan Congress are throwing the austere “lockbox” out the window in favor of deeper tax cuts for individuals and businesses — including capital gains, faster equipment write-offs, accelerated personal tax-rate reduction, and possibly FICA payroll tax cuts. These supply-side measures will lower after-tax production costs, raise investment rewards, and make it less costly to rehire unemployed workers.

Meanwhile, fiscal policy could inject upwards of $150 billion in new stimulus over the next year. Already, $40 billion for the military and the rebuilding of Downtown New York is being put in the pipeline. Both will bolster the depressed technology sector. The Pentagon communications network, for example, was severely damaged and must be quickly rebuilt. In New York, under the Herculean exhortations of Rudy Giuliani (“We’re gonna rebuild. . . . We’re gonna come out of this stronger than before”), relocating businesses will stimulate a technology spending boom on computer, telecom, and Internet-related equipment.

The Greenspan Fed is also doing its part. It has already added $70 billion in new bank reserves with more coming. Its policy target rate will probably drop 50 basis points this week to 3%, and another 50 to 2.5% in early October. For 18 months the economy has suffered from a shortage of liquidity; now that problem looks to be remedied.

Over at the SEC, chief Harvey Pitt has announced that the securities regulator will provide stock-market liquidity by making it easier for companies to buy back their own shares. This is a big plus for investors who will reap new profits at a lower capital-gains tax rate.

More liquidity, lower taxes, declining interest rates, near-zero inflation, a stronger defense posture — these are all pro-growth policies that will fuel stock-market gains and economic recovery. Investors can do their part by funding recovery through the stock market, beginning with the opening bell on Monday. Patriotism is profitable, and freedom will prevail.



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