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Declaring War On Recession
Why isn't the administration endorsing bold measures?


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Larry Kudlow

Crucial to winning the global war against terrorism is a bold plan to wage war on the domestic recession. But Washington has no such plan. Respected policymakers look timid, cautious, and out of touch with the reality of a declining economy. Veteran graybeards advise Congress to do nothing, seemingly deaf to an economic call to arms.

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The latest unemployment claims report ratcheted up nearly 60,000 to 450,000 — a nine-year high. This implies a huge drop in jobs and a big jump in unemployment is on the way. A just published and miserable durable-goods report says the technology sector is evaporating in cyberspace. Over the three months ending in August, a composite high-tech index for shipments dropped 50.1% at an annual rate. Technology was the biggest contributor to the economic boom of the 1990s. Now it is the biggest drag. Even consumers are suffering from terrorist aftershock as weekly chain-store sales are turning negative.

Something has got to be done, but Washington isn’t doing it. The Bush administration’s economic officials have been ineffectual. There is no action-plan script, no talking points, no communication strategy. In short, there’s no leadership on the domestic economic front. The administration is performing brilliantly in the early stages of the war against terrorism. But thus far, it has shown no similar instincts in the war against domestic recession.

If the domestic slump is left unattended, the nation will eventually become demoralized. Without economic vitality at home, it will be all the more difficult to maintain our edge overseas. Rising unemployment drains the spirit, but we need exactly that spirit to conquer our enemies.

The economy needs a jolt. It needs risk-taking. But policymakers seem unwilling to take risks. Robert Rubin and Alan Greenspan — who keep telling us that too much stimulus will cause inflation — are providing more status-quo thinking at the very moment we need leaders who can size up the current situation and then think outside the box to provide solutions.

Mr. Rubin’s arguments about budget surpluses and long-term bond rates are red herrings at best. Actually, as the recession-driven federal budget moves into deficit, Treasury market interest rates are dropping to 40-year lows, undercutting Rubin’s entire argument on the need to maintain budget surpluses at any economic cost. He has never understood that growth produces surpluses, rather than the other way around. The former Clinton Treasury man tells us that demand-side consumer tax rebates are okay while supply-side tax cuts on successful high-end earners and capital investments are not. Go figure. This is not economic analysis. It’s a plain vanilla, liberal-redistribution agenda.

Mr. Greenspan, meanwhile, says that capital-gains tax cuts are not the best way to deal with the economy’s short-term problem. Yet it is exactly the deflation of capital asset values through the stock-market decline and the deepening slump in business profits that cries out for new incentive rewards for capital investment. Instead of pompous proclamations, let’s do an historical scrub of the after-effects of cap-gains relief. If we do, it will show that faster economic growth, rising stock markets, and stronger budget revenues always follow lower tax-rates on capital investment.

Jack Kemp and Sen. Zell Miller have it exactly right in their editorial proposal to slash cap gains, accelerate the depreciation of investment in plant, equipment, and technology, and make the phased-in personal tax-rate reductions effective immediately. Their monetary view that the Federal Reserve should abandon its interest rate target in favor of larger emergency cash injections is also correct.

So, why aren’t administration economists endorsing these bold measures? Why aren’t they making the case that it’s business that creates jobs, and that business desperately needs a fresh capital infusion? No amount of consumer tax rebates will stop the unemployment rate from rising if capital-starved and profit-losing businesses don’t get immediate relief from a permanent reduction of tax-rates. Bush policymakers should also make the case that the twin crises of war and recession will require a temporary budget deficit of roughly 1.5% of GDP ($150 billion) to finance tax-cuts, defense, and infrastructure-rebuilding policies that are necessary to re-ignite economic growth.

The public is four-square behind the president in the global war against terrorism. It will also stand four-square behind the president in the war against recession. Indeed, the public knows that a strong domestic economy is vital to the war effort. Since President Bush’s spectacular speech rallying the nation for the global war against terrorism, the Dow Jones stock index has appreciated 7%, or roughly 600 points. If the president rallies the nation with a war plan to end recession, the market will rise exponentially, signaling economic recovery and the revival of the American spirit.



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