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No Time For a Growth Recession
Without a postive economic message, GOP heads will roll in November.


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Larry Kudlow

A new economic-stimulus plan now under consideration by President Bush can’t come soon enough — for the sake of both the economy and congressional Republicans. While there are still no serious signs of a double-dip recession, the leading economic indicators are pointing to second-half economic growth that may well be less than the first-half’s performance. If we slow much more, not only will businesses, investors, and consumers suffer — Republican heads are going to roll in November.

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This week, the Conference Board — which produces the closely watched Index of Leading Economic Indicators — reported that business recovery is not yet at hand, orders for consumer and capital goods have been flat over the past three months, consumer expectations have declined, and, of course, stock prices have until very recently been plunging.

Measured over six-month periods, the Conference Board’s index has gradually descended from 5.2% annualized growth in March to a two-tenths-of-one-percent rate of decline in July. Statistical models using this index to predict our gross domestic product over the next couple of quarters suggest GDP growth of only 2.5% adjusted for inflation.

This abnormally slow pace of economic recovery, with the likelihood of virtually no improvement in job creation, looms as a big political problem for Republicans who want to keep the House and regain the Senate this fall. A 2.5% economic-growth rate could be labeled a growth recession. The Democrats will gladly do the labeling.

Since World War II, the U.S. has experienced ten recessions, yet our economy has grown at an average rate of 3.5% yearly. So, while the current recession clearly began on President Clinton’s watch, the Bush Republicans are not able to crow about providing a strong economic fix. Even with a reasonable upturn in the stock market in the months ahead, millions of investors are likely to remain in a dour mood as their monthly financial statements show all too often that their 401(k)s have become 201(k)s.

Key midterm-election races are frequently decided on idiosyncratic personal or local battles. But as Newt Gingrich showed in 1994 it helps enormously when Republicans have a positive national message that clearly distinguishes them from Democrats. Going on the offensive with a pro-growth message and pro-investor tax cuts would draw more voters than a defense of second-year Bush mistakes — a longer-than-expected list that includes tariffs on steel and a free-spending education bill.

The more the debate over Iraq occupies the front pages in the weeks following Labor Day, the tougher it will be for a Republican pro-growth message to congeal. That’s why President Bush’s tax-cut announcement, made during last week’s economic conference in Waco, Texas, may have arrived just in time.

But any new tax-cut plan from the White House must be all cattle and no hat.

First, dividend relief should be across-the-board for businesses and individuals. A puny tax exemption for individuals alone will not do the job. A better idea is to tax dividends at the same 20% personal rate as capital gains. Next, enlarged capital-loss deductions should be significant. For business, interest and dividend expense should receive the same tax benefit. This will curb debt excesses and make shares more attractive to investors.

The Bush crew should also propose that small business start-ups remain tax-free for several years, and be taxed at a lower-than-normal rate for a few years thereafter. This last recommendation will also help the Bushies escape the “big-business” label.

The old political landmines of rising inflation and unemployment don’t pack nearly the same punch in today’s investor-class economy. The dismal stock market is today’s biggest political threat, one that has already eroded Bush’s standing in the polls.

But those same surveys still give the man from Texas high marks on leadership, moral standards, strengthening the military, handling foreign affairs, and cutting taxes. A recent survey by TechnoMetrico Market Intelligence, a provider of accurate investor-related surveys, shows Bush with a two-to-one lead over Congress on cutting taxes, and similar margins in managing the federal budget and the economy.

More, independent voters — the key swing bloc today — prefer a Republican Congress to a Democratic one by 37% to 33%. So, despite setbacks on the policy front this year, the president still has reasonably strong credibility with voters. If he builds on this political capital with a strong tax-cutting message, a major stock-market rally and a Republican sweep of both houses are not out of the question.

Let the Democrats wage Gore-ist class warfare. It’s a proven loser, so long as Republicans clearly show they are truly out to help investors and revive businesses.



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