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New Year Cheer
The gloomsayers were wrong about 2002. Ditto for 2003.


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Larry Kudlow

U.S. war-making plans are intensifying for regime change in Iraq, the Iranians are building new nuclear weapons, and the nuke-making North Koreans are selling scud missiles to Yemen and building more of their own. In other words, the axis of evil is busy doing what it does best, and as 2002 comes to a close uncertainty hangs heavy in the air.

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Yes, the world is a dangerous place. But as Defense Secretary Donald Rumsfeld keeps telling us, the U.S. is quite capable is of operating militarily on several fronts.

The gloomsayers, of course, are wringing their hands at the potential negative ramifications of war on the economy. They also add in the fact that a middle-class strike in Venezuela has curtailed oil production from our second biggest exporter. But the gloomsayers have been proven wrong time and again.

After Sept. 11 and the start of the war on terror, the consensus of economists predictably predicted a long and protracted recession. Just as predictably, they were wrong.

Faced with war, plunging stock markets, and a wave of corporate corruption and accounting fraud, our gross domestic product is expanding — not shrinking — with the economy recovering at a 3 percent pace over the past year. That’s a sub-par rate, but it is testimony to our resilient, flexible, technology-laden, and productivity-enhanced free-market system. Other nations with far less economic freedom are not so blessed — just ask Germany, the sick man of Europe, or Japan, the Land of the Setting Sun.

Today, record-breaking productivity gains are underscoring the great efficiency of the American workforce and the businesses that employ our workers. In 2003, they’ll be helped along by the Federal Reserve, which has finally awakened from its senior slump and is now pouring plenty of new cash into the economy. Price deflation has ended and profits reflation has begun. Rising profits will fuel capital spending and boost dormant share prices.

In 2002, a falling stock market accompanied the first year of an economic recovery. That hasn’t happened since William Howard Taft was president in 1912 — ninety years ago. Don’t look for it to happen again.

In fact, the stock market should rise across the board in 2003 — with tech and non-tech, old and new economy, cyclical and non-cyclical, and value and growth stocks all benefitting from the nurturing incentives of broad-based tax reduction for businesses and individuals, along with easier money.

In addition, the likelihood of a substantial reduction in the personal tax rate on company dividend payouts will make share prices more attractive to investors and force businesses to again toe the line of discipline. Corporations will free up cash flows, emphasize equity over debt, and restore shareholder returns. As CEOs step back into line, investors will reap well-earned rewards.

With the recent mid-term election sweep, President George W. Bush has a mandate to do what it takes to effectively prosecute the war on terrorism, improve homeland security, and expand the economy. Bush recognizes that vibrant economic growth at home is vital to the war effort, and he now has a treasure trove of political capital to drive policy reforms. This includes tax reform, school choice, personal-retirement-account reform of Social Security, pro-market healthcare measures, and tort reform to curb the business-bankrupting legal abuses of the plaintiff bar.

More, after getting off on the wrong foot with steel and lumber tariffs, the administration won trade promotion authority in Congress and is now embarked on a tariff-ending global free-trade plan that has economic growth written all over it.

The Bush administration will remain on a pro-growth path, and they’ll be prodded to do so by an 85 million strong investor class, perhaps the most important political force today. While a new team of economic advisors is coming into the White House, George Bush and Dick Cheney still give us two pro-growth supply-siders at the top of the policy-making ladder.

A run of moral amnesia in the upper reaches of corporate life shocked all of us in 2002. But the American spirit has always contained a moral conscience. Prodded by unprecedented white-collar prosecution, look for the American conscience to re-emerge in the period ahead.

Our system of economic freedom works. And it is a system worth defending. As someone who has faith in this nation, and believes we are governed by a power greater than ourselves, I have no doubt that good will overcome the evil governments of Iraq, Iran, and North Korea, as well as terrorism around the globe — and that optimism will prove the pessimists wrong every time.

Mr. Kudlow is CEO of Kudlow & Co.



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