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A Solid One-Two Punch
Bush & Greenspan are making a great economic team.


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Larry Kudlow

Fresh off his stunning mid-term election victory, President Bush wasted no time in putting his newly acquired political capital to work. First he slammed a homeland-defense bill through the Senate. Then — the very next day — he said he intends to offer “new ideas” on ways to stimulate the economy.

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At an impromptu press briefing, Bush told reporters that the Fed chairman uses the term “soft spot” when describing the economy, and that he prefers to say “bumping along.” No matter what they call it, it’s hugely important to see George W. Bush and Alan Greenspan on the same page, working to improve the economy.

Bush indicated that he’s looking at a whole string of tax-cut proposals. It is known that White House economists are seriously considering accelerated personal income-tax cuts, full cash expensing for business investment, an end to the alternative minimum tax and the double taxation of dividends, and a lowering of the capital-gains tax. Wow. That’s a splendid pro-growth tax-cut package.

Bush also mentioned that the budget deficit would have been bigger without last year’s tax cuts, and he moved to the supply-side when he told reporters that better economic growth will produce more revenues and a lower deficit. He’s got that right.

Meanwhile, before Congress this week, Greenspan fended off tax-the-rich Democrats when he said an upper-income taxpayer’s marginal propensity to consume is probably just as great as that of a lower-income taxpayer. This is a useful argument.

Liberals have it in their little brains that tax cuts for the rich will only result in more saving (as though that were a bad thing). But the Fed chairman stated that rich people are pretty good spenders as well as investors. In making this case, it was as if Greenspan was telling the liberal Democrats, “You goofballs still just don’t get it.”

To be sure, Greenspan’s comments are based solidly in fact. A Fed study shows that the top quintile of income earners account for 25% of total U.S. consumption, higher than any other group. So-called “rich people” also do most of the saving and investing in this country. Dual earners making $90,000 or more pay 49% of the the taxes, account for 25% of total consumption, and save and invest 30% of America’s seed capital.

So score one for the Maestro on tax cuts, and give him another point on the monetary side of the ledger. Greenspan again pledged to Congress that Fed monetary policy would remain “accommodative.” His testimony is corroborated by the classical monetary measures. Gold prices have been rising over the past 18 months, while the dollar-exchange index has been declining most of this year. This is proof the Fed is doing its job to end deflation by creating plenty of new cash for the economy. Last week’s half-point rate cut was a means to this positive end.

So, the president and the Fed chairman appear to be cooperating in the development of a new pro-growth policy mix — supply-side tax cuts to reignite business investment and risk taking, and easier money to finance a hoped-for growth spurt. If only they could get Treasury Secretary Paul O’Neill on board.

Inexplicably, O’Neill told a Fortune magazine conference that he didn’t believe broad-based tax cuts are necessary. He would rather consider “targeted stimulus proposals” to help particular industries. This sounds like something from the Carter-Mondale era.

These off-the-reservation comments underscore the president’s need to find a new captain for his economic ship — someone who is completely in sync with the presidential growth package and has the communication skills to sell it to Congress and the public. Someone like New York Stock Exchange president Richard Grasso. His massive rolodex of key financial-market players and his indefatigable can-do spirit make him an ideal choice to replace O’Neill, who’s a fish out of water at the Treasury. More, such an appointment would punctuate the president’s determination to move his pro-growth economic agenda forward.

Investors, of course, will wait until they learn more before celebrating. They’ll need to see the fine-print of any new plan, and won’t take action now if the tax cost of investing will be substantially lower next year. That could mean the fourth-quarter economy will remain soft — but next year’s stock-market rise and economic growth surge could be real barnburners if the president has his way.



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