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Terminating Any Doubt
Arnold�s a supply-sider � which works to Bush�s advantage.


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Larry Kudlow

Try this on for size: A successful Arnold Schwarzenegger plus strong economic recovery spells big victory for George W. Bush. Let’s start with economic recovery. The stock market recently broke out of its summer doldrums on news of unexpectedly good retail sales and hardgoods production, near-record housing starts, and above-expectation reports for business revenues and profits. Not even rising bond rates or blackouts can stop the powerful new bull-market cycle — which was sparked by President Bush’s sweeping tax cuts.

Politically, this is good news for Bush. If the economy is operating at 4 to 5 percent growth during next year’s presidential election campaign, it will literally shut Bush’s major window of political vulnerability.

But there’s also the Terminator Factor working to Bush’s advantage.

In a dramatic news conference this week, actor-turned-gubernatorial-candidate Arnold Schwarzenegger made it clear that he will occupy right-of-center territory when it comes to fiscal matters in the forthcoming recall election to throw out California’s incumbent Governor Gray Davis.

Prior to the news conference, conservatives were up in arms over statements made by Schwarzenegger’s friend and advisor Warren Buffett. The famous investor argued that California property taxes are too low and that Proposition 13 — which limits property-tax increases — should be overturned. But Schwarzenegger rejected Buffett’s cynical advice and reached out to conservatives, saying, “Sacramento has overspent, overtaxed, and overregulated our businesses.”

The former bodybuilder then underscored his business-friendly, supply-side agenda by telling reporters, “I told Warren, if he mentions Prop. 13 one more time, he has to do 500 sit-ups.”

Schwarzenegger, in fact, said he would oppose all new taxes and fees, and went to bat for overtaxed Californians. “From the time they get up in the morning and flush the toilet, they are taxed,” he said. “When they go get a coffee, they are taxed. When they get in their car, they are taxed. When the go to the gas station, they’re taxed. When they go to lunch, they’re taxed. This goes on all day long. Tax. Tax. Tax. Tax. Tax.” Not surprisingly, these statements came only days after the actor and businessman spoke for two hours with former Reagan advisor and supply-side guru Arthur Laffer.

So now, instead of raising taxes, Schwarzenegger will seek a constitutional cap on California state spending. “Now, does this mean that we’re going to make cuts? Yes,” he said. Schwarzenegger said he will appoint an outside group to examine the state’s books, which fell into complete disrepair under Davis.

The Terminator will cut where he can: He will roll back the soaring cost of workers-compensation premiums that has driven job-creating small businesses out of state. He will roll back the car tax. He will oppose drivers licenses for illegal immigrants. Spiraling budget costs for illegals are a major cause of California’s out-of-control spending and massive deficits. Schwarzenegger is all over it.

The Terminator also made it clear that he is running against the special-interest sway in Sacramento — and few may sway more than his incumbent rival. Thirty-five percent of Davis’s campaign contributions come from government employee unions and trial lawyers. This is why Davis passed an incredible three-year, budget-busting, 34 percent salary hike for state prison guards — a hike that Schwarzenegger intends to roll back.

Behind the Terminator’s public conversion to Reaganomics is the magisterial figure of George Shultz, the co-chair of Schwarzenegger’s economic-recovery council. The crusty ex-Marine served in top posts for Presidents Nixon and Reagan, and tutored George W. Bush in the early days of his first presidential campaign. It’s little surprise that Shultz quickly turned off Warren Buffett’s high-tax water.

Shultz also boasts a team of high-powered economic colleagues in Michael Boskin (a former economic advisor to Reagan and Bush the Elder), Martin Anderson (a longtime Reagan hand), and John Cogan (a former Reagan budget expert and campaign advisor to Bush the Younger).

Schwarzenegger’s fiscal conservatism enables a big-tent under which the badly splintered California GOP can unite and capture the statehouse. Of course, such an outcome will give Bush a tremendous leg up in the 2004 campaign.

If bolstered by a rising, job-creating economy — one that the stock market is now predicting — at the very least Bush will be competitive in California. This will force his Democratic opponents to spend considerable time and resources in the Golden State rather than other toss-up states on the campaign trail. And should Bush conceivably carry California, the Texan could win a second term by more than 40 states.

Bush’s top advisor Karl Rove has long sought a transformational shift in U.S. politics. A Governor Schwarzenegger-led California Republican party would move the ball in that direction. Putting California in the GOP column creates a truly national governing coalition. Both President Bush and the nation will be better for it.

Mr. Kudlow is CEO of Kudlow & Co.



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