Jewish World Review Sept. 23, 2004 / 8 Tishrei, 5765
E. Thomas McClanahan
How to destroy our fragile economy without al Qeida
http://www.jewishworldreview.com | President Bush says the economy is ``strong and getting stronger.'' Democrat John Kerry begs to differ.
Kerry says job-creation has been anemic and Bush is ``now certain to be the first president since the Great Depression to face re-election without creating a single job.''
Variations on this argument are played out in virtually every presidential election. Presidents can't direct the month-to-month movements of the economy, but they're held accountable at the ballot box. Challengers try to paint as gloomy a picture as possible, and Kerry is no different.
Kerry's approach, however, illustrates the sheer incoherence of Democratic thinking. The Bush administration, Democrats say, has squandered the surplus of the late 1990s and driven the federal budget into deficit. Bush has given the rich a huge tax cut while working families struggle to get by.
This focus on the deficit is odd, given that Democrats once believed the cure for virtually every economic ill was to prime the pump with federal spending.
Moreover, Kerry would have the voters believe that in an economy as weak as he (implausibly) contends, the best remedy is a big tax increase for the rich, defined as taxpayers with incomes above $200,000.
This is the centerpiece of his economic plan, which is intended to call forth the revenue needed for a vast menu of spending proposals, including an expensive health-care plan and college tuition aid, while magically reducing the deficit.
The fixation on the deficit, however, owes more to Herbert Hoover than traditional Democratic economic theory. Hoover raised taxes in a faltering economy out of fear that federal borrowing would soak up capital needed for recovery.
In 1931, that was the conventional wisdom. Walter Lippmann, a leading columnist of that era, put it this way: ``The quicker it is settled that high rates are to be imposed on the rich, the sooner Congress and the country can settle down to the real problem, which is to devise a tax program so broadly based, and so invulnerable to depression that there can be no further question about the adequacy of government revenues.''
Following this logic, Senate Minority Leader Tom Daschle argued in 2002 that the Bush tax cuts may have worsened the recession - even though there's almost no correlation between the deficit, the availability of capital and the level of interest rates.
He forgot that the U.S. economy is not a closed system. As long as our economy is a good place to invest, capital will flow in, interest rates will remain low and growth won't be choked off.
Certainly the deficit plays a role in shaping the investment climate, but tax rates - and the all-important return on risk - are far more important. Growth depends on risk-taking; reducing the returns from risk-taking reduces growth.
The Democrats are right that Bush has a lousy fiscal record. He's left himself open to attack on that score. But his response to the recession, by and large, has been what it should have been. He pulled every possible lever to get the economy moving.
Tax cuts and higher federal spending, combined with dramatically lower interest rates from the Federal Reserve, helped turn the corner after the recession of 2001. Growth took hold and began to accelerate, slowly at first, then more rapidly last year.
Despite the summer ``soft patch'' described by Fed Chairman Alan Greenspan, 1.5 million jobs have been created this year alone. The most recent payroll figures showed 144,000 jobs created in August - hardly spectacular but a number indicating, as Greenspan put it, that the economy had ``regained some traction.''
Disposable personal income is on the rise, inflation is low and growth this year is expected to exceed 4 percent, compared with the 1990s average of just over 3 percent.
Considering the tumultuous events of the last four years - a catastrophic terrorist attack, war, rising oil prices, corporate scandals and the continuing hangover from the telecom bust - the economy has shown amazing strength. We could use a lot more fiscal discipline, but certainly not another tax increase.