KUDLOW'S TAKE
by Lawrence Kudlow


DECLARING WAR ON RECESSION
Why isn't the administration endorsing bold measures?

October 1, 2001 8:00 a.m.


Crucial to winning the global war against terrorism is a bold plan to wage
war on the domestic recession. But Washington has no such plan. Respected
policymakers look timid, cautious, and out of touch with the reality of a
declining economy. Veteran graybeards advise Congress to do nothing,
seemingly deaf to an economic call to arms.

The latest unemployment claims report ratcheted up nearly 60,000 to
450,000 - a nine-year high. This implies a huge drop in jobs and a big jump
in unemployment is on the way. A just published and miserable durable-goods
report says the technology sector is evaporating in cyberspace. Over the
three months ending in August, a composite high-tech index for shipments
dropped 50.1% at an annual rate. Technology was the biggest contributor to
the economic boom of the 1990s. Now it is the biggest drag. Even consumers
are suffering from terrorist aftershock as weekly chain-store sales are
turning negative.

Something has got to be done, but Washington isn't doing it. The Bush
administration's economic officials have been ineffectual. There is no
action-plan script, no talking points, no communication strategy. In short,
there's no leadership on the domestic economic front. The administration is
performing brilliantly in the early stages of the war against terrorism. But
thus far, it has shown no similar instincts in the war against domestic
recession.

If the domestic slump is left unattended, the nation will eventually become
demoralized. Without economic vitality at home, it will be all the more
difficult to maintain our edge overseas. Rising unemployment drains the
spirit, but we need exactly that spirit to conquer our enemies.

The economy needs a jolt. It needs risk-taking. But policymakers seem
unwilling to take risks. Robert Rubin and Alan Greenspan - who keep telling
us that too much stimulus will cause inflation - are providing more
status-quo thinking at the very moment we need leaders who can size up the
current situation and then think outside the box to provide solutions.

Mr. Rubin's arguments about budget surpluses and long-term bond rates are
red herrings at best. Actually, as the recession-driven federal budget moves
into deficit, Treasury market interest rates are dropping to 40-year lows,
undercutting Rubin's entire argument on the need to maintain budget
surpluses at any economic cost. He has never understood that growth produces
surpluses, rather than the other way around. The former Clinton Treasury man
tells us that demand-side consumer tax rebates are okay while supply-side
tax cuts on successful high-end earners and capital investments are not. Go
figure. This is not economic analysis. It's a plain vanilla,
liberal-redistribution agenda.

Mr. Greenspan, meanwhile, says that capital-gains tax cuts are not the best
way to deal with the economy's short-term problem. Yet it is exactly the
deflation of capital asset values through the stock-market decline and the
deepening slump in business profits that cries out for new incentive rewards
for capital investment. Instead of pompous proclamations, let's do an
historical scrub of the after-effects of cap-gains relief. If we do, it will
show that faster economic growth, rising stock markets, and stronger budget
revenues always follow lower tax-rates on capital investment.

Jack Kemp and Sen. Zell Miller have it exactly right in their editorial
proposal to slash cap gains, accelerate the depreciation of investment in
plant, equipment, and technology, and make the phased-in personal tax-rate
reductions effective immediately. Their monetary view that the Federal
Reserve should abandon its interest rate target in favor of larger emergency
cash injections is also correct.

So, why aren't administration economists endorsing these bold measures? Why
aren't they making the case that it's business that creates jobs, and that
business desperately needs a fresh capital infusion? No amount of consumer
tax rebates will stop the unemployment rate from rising if capital-starved
and profit-losing businesses don't get immediate relief from a permanent
reduction of tax-rates. Bush policymakers should also make the case that the
twin crises of war and recession will require a temporary budget deficit of
roughly 1.5% of GDP ($150 billion) to finance tax-cuts, defense, and
infrastructure-rebuilding policies that are necessary to re-ignite economic
growth.

The public is four-square behind the president in the global war against
terrorism. It will also stand four-square behind the president in the war
against recession. Indeed, the public knows that a strong domestic economy
is vital to the war effort. Since President Bush's spectacular speech
rallying the nation for the global war against terrorism, the Dow Jones
stock index has appreciated 7%, or roughly 600 points. If the president
rallies the nation with a war plan to end recession, the market will rise
exponentially, signaling economic recovery and the revival of the American
spirit.