An old friend who is currently serving as a senior White House policy advisor e-mailed the other day. He noted that in the recent Wall Street Journal survey the consensus of 54 economists agreed on a fourth-quarter economic rebound followed by a 3% GDP growth rate in next year’s first half. But he also observed that 3% growth is far below the 4-5% expansion rate that prevailed during the second half of the 1990s.
Then came the question: “Fed rate cuts and tax cuts should help. But are there additional policy actions that would help bring the annual GDP real growth rate back up to 4-5%?”
Well, my friend, yes. There are a number of growth-producing policies that could be put into play. And you are right to be concerned that a sub-par recovery rate will be disappointing — both for the president and the nation.
As you know, Democrats like Tom Daschle and Kent Conrad are already carping on the fact that budget-surplus estimates are shrinking as a result of the economic downturn. Hardly a day goes by when Daschle or some other Democrat doesn’t talk about “revisiting the tax cut.” This means, of course, that they wish to repeal the out-year tax-rate reductions that are scheduled for the next four years. Lately they are whining about “robbing Medicare and Social Security funds” as though there were some vault into which trust-fund surpluses are placed. But of course there is no vault. And there is no fiscal crisis. In fact, it is utterly baffling to me why policy makers want to run a budget surplus during recession. No self-respecting Keynesian, much less a pro-growth supply sider, would make such a goofy argument.
Nevertheless, the Bush administration should target a 4-5% economic recovery rate. Growth solves most fiscal problems. Here are some thoughts about future policy modifications:
1) Quit talking about energy price caps. President Bush is a free enterpriser who knows full well that price controls do not increase power supplies, nor do they reduce consumption demands. Already, in California, the price caps have backfired as power has been withheld from the market, causing blackouts. Investors and suppliers will hold back as long as the price caps are in play.
2) Stop the steel-dumping protectionist investigation. All protectionist threats are a deterrent to investment and commerce.
3) Repudiate Democratic efforts to roll back the tax-cut plan. Make the growth arguments and talk about after-tax incentives that will generate greater capital formation, productivity, and jobs. Forcefully defend lower tax rates as permanent, in order to assure workers and investors they will receive future benefits.
4) Veto any Patients’ Bill of Rights legislation that mandates higher health costs and over-regulates the industry. Creeping Hillary Care is even more insidious than galloping Hillary Care. Ditto for unlimited product liability lawsuits. If the president makes the case, the public will revolt against any Trial Lawyers’ Bill of Rights.
5) Defend American businesses and American values of democratic entrepreneurial capitalism at the forthcoming Group of Eight meeting. Make the case to Euro anti-trust busters that no nation should shield its companies from the rigors of market competition. Point out that actions such as the recent Mario Monti rejection of the GE-Honeywell deal have helped bring about the collapse of the euro, which increasingly looks like the euro-peso.
6) Appoint market-based monetary policy makers to the open seats on the Federal Reserve Board. Right now, with employment sagging and commodity prices plunging, the Fed should be lowering its key policy rate in-between official meetings. Markets, not outdated economic models that trade off inflation with growth, should guide Fed policy. More aggressive easing is necessary immediately.
7) Fight hard to attach a 15% capital-gains tax rate to the minimum-wage bill now pending in Congress.
8) Propose a broad-based flat-tax reform.
9) Work hard to implement individual savings accounts as part of a Social Security overhaul.
10) Stay the course on hemispheric free trade.
Investor spirits are still sagging and confidence is low. There’s over $2 trillion of cash laying fallow in money-market funds, but entrepreneurs and other economic activists don’t yet have the confidence to put this money to work in the economy. American prosperity over the past two decades was based on ideas, innovations, and risk taking. These require capital investment — indeed risk-capital investment. That, in turn, requires confidence that government will do no harm.
Most of all, President Bush must stick to his free-market policy compass and use the bully pulpit to promote growth-inducing policies of consumer choice, market competition, tax incentives, and free trade.