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Wednesday House Speaker Dennis Hastert convened a meeting of the
congressional leadership and three economists to discuss an economic
stimulus package to reverse the sinking stock market. The principals
in the meeting included Hastert, Trent Lott, Tom Daschle, and Dick
Gephardt. The economists Hastert invited were Fed Chairman Alan
Greenspan, Clinton Treasury Secretary Robert Rubin, and Bush economist
Larry Lindsey.
The meeting
couldn't have gone worse and is an indication of the lousy advice
Republicans are getting on the economy. Incredibly, not a single
one of the economists there supported the most urgent stimulus measure
of all: a capital-gains tax cut.
Greenspan
told the congressional leaders that they should wait two or three
more weeks until he has "better data" before Congress passes an
economic-rescue plan. (Apparently the near 1,000-point decline in
the Dow Jones isn't plain enough evidence that the economy is in
a world of hurt right now.)
Robert Rubin
then chimed in to spout traditional Keynesian orthodoxy, arguing
that any tax-cut plan should be "temporary." That is to say that
it should have no lasting positive effect on the economy. Rubin
advised Congress to expand the earned-income tax credit to low-income
people who don't pay any income taxes, so they will go out and spend.
Lindsey argued
for a package of business tax cuts, including a corporate income-tax
rate cut, which will help the economy, but not nearly as much as
or as rapidly as a capital-gains cut to 10%. I find myself totally
mystified by this White House: The Bush team seems inflexibly opposed
to capital-gains reductions even though almost every supply-side
economist has continually advised them that this would help the
stock market more than any other policy change on the table. We
could have had a capital-gains tax cut four months ago as part of
the original Bush tax plan if the White House had shown even a scintilla
of interest. We could have one right now if Bush would simply endorse
it. So far, excruciating silence from 1600 Pennsylvania Ave.
Finally, Gephardt
and Daschle reportedly advocated "more infrastructure spending"
to get the economy moving again. This idea is almost laughable.
The federal appropriations have been growing by about 7 percent
per year for the past three years. This year federal spending is
likely to rise by at least $100 billion, not counting the extra
$40 billion just recently approved for "emergency spending" for
the military and the massive clean-up job that lies ahead. As NRO's
Larry Kudlow has shown, the only sector of the American economy
that has been growing since the start of the year has been government--state,
local, and federal.
Lindsey, to
his credit, zinged the Democratic leaders by noting that they are
in effect endorsing the Japan recovery plan for America. The Japanese
government has virtually paved over the entire island with public-works
spending, and this former economic superpower is now entering its
11th year of recession.
The only two
people in this meeting that had the right idea on the economy were
Hastert and Lott. They both want to cut the capital-gains tax to
10%. But they were isolated--surrounded by a sea of boneheaded thinking
on the economy.
The good news
is that House Republican leaders Dick Armey and Tom Delay are unflinchingly
committed to capital-gains reduction as a "must pass" item of any
economic stimulus bill. Increasingly, they are confronted with the
astonishing argument that a capital-gains tax cut will cause a wave
of selling and thus depress the stock market. Henry Aaron of the
Brookings Institute made this silly argument in the Washington
Post the other day. And the White House has similar concerns.
But every capital-gains tax cut in history has raised stock values,
not lowered them. A capital-gains tax cut increases the after tax
value of stocks, so it is impossible for the stocks to fall in price.
A capital-gains tax cut is desirable now precisely because it will
raise stock values and reverse the catastrophic market slide over
the last week.
I am increasingly
worried that Bush and Congress — in the name of bipartisan
unity — will enact a completely impotent economic stimulus
plan. This is the greatest economic emergency our nation has faced
since the stagflationary 1970s when we faced a gusher of double-digit
inflation. This is not the time for half-measures or for tinkering.
In just the past week American investors have lost a horrific $1
trillion in asset values. The entire budget surplus--or the $80
to $100 billion or so that is left of it--should be devoted to growth-stimulating
tax cuts. If Democrats won't go along, let them have $40 billion
for new spending. That is a trivial price to pay in exchange for
capital-gains tax cuts, expensing for big-ticket business capital
purchases, and acceleration of tax-rate cuts in the original Bush
plan. Why cut tax rates in 2005 and 2006? Do it now!
Bush needs
to lead on the economy — not follow a rudderless Congress.
He now has an 80% approval rating with voters. Like his father exactly
10 years ago, who had a 90% approval rating at one point, George
W. can command almost whatever he wants out of Congress. Bush Sr.
frittered away that political capital through indecisiveness and
lack of action.
Bush must
immediately send an economic-rescue plan to Congress insisting on
three items: Cut the capital-gains tax in half; give businesses
real tax relief; and fast forward all the tax-rate cuts in his original
tax plan to an effective date of 9/11/01.
It took just
48 hours for Congress to pass an emergency military appropriations
to fight the war against terrorism. It shouldn't take more than
48 hours for an emergency plan to fight the war at home against
recession.
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