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Jewish World Review July 16, 2001/ 25 Tamuz 5761

Lawrence Kudlow

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To Russia with love -- THIS year, an overcast economy is spoiling the usual fun-in-the-sun. The much-vaunted summer stock-market rally has yet to materialize in most bourses around the globe. Japan and the Pacific Rim have slipped back into recession. Europe sits on the recessionary cusp. A currency crisis threatens the economies of Latin America's Southern Cone. And recent trends for U.S. production and employment have recession written all over them.

Is there a ray of hope out there? Well yes, and it's in the most unlikely of places: Russia. Where? Yes, Russia -- land of today's best-performing stock market. Joe Stalin must be rolling over in his grave.

According to supply-side founder and former Reagan advisor Arthur Laffer, capitalism has finally come to Russia. In a recent article, the California economist points out that as of January 1, 2001, the highly progressive, anti-growth, and incredibly complex Russian tax-rate system was replaced by a 13% flat tax. Corporate taxes are next in line to fall.

While presidential candidate Steve Forbes made the flat-tax case in 1996 and 2000, the U.S. wasn't listening. Russia's Vladimir Putin, however, appears to have excellent hearing and considerable foresight.

What does Putin know that anti-tax-cutters like France's Lionel Jospin, Japan's Junichiro Koizumi, and Sen. Tom Daschle don't? Simple. Tax incentives affect economic behavior. Art Laffer has taught this for many years: Tax something less, you get more of it. Tax something more, you get less of it. There's an inverse relationship between tax-rates and economic growth.

By taxing work, production, and investment less, Russia can now boast of a 40% year-to-date stock-market gain. Compared to Germany's 10% drop, or Japan's 13% loss, or the U.S.'s 11% setback, Russia -- all of a sudden -- is looking pretty good.

By no longer over-taxing those very same means of production that Marx and Lenin constantly ranted about, stronger Russian economic growth is now throwing off budget surpluses as far as the eye can see. Foreign debt is being paid down and IMF prosperity-killers have been given their walking papers. The perpetually sinking Russian ruble has stabilized and the inflation rate is descending.

On the foreign-policy front, Russia looks bullish as well. Former Reagan Treasury official Paul Craig Roberts has a fascinating new vision for U.S.-Russian relations. Roberts believes that in the post-Cold War period, the European Union will not be a U.S. friend -- and may well be the enemy. He cites the EU's bureaucratic superstate of over-regulation, their Euro-whining anti-American rudeness toward President Bush, and their protectionist anti-trust shielding of Euro businesses from the marketplace rigors of the best U.S. companies. In other words, the Eurocrats are on the wrong side of history.

Dr. Roberts concludes that the U.S. should forge a new alliance with Russia based on mutual economic and political goals. In a recent article he asks: "What worthier foreign-policy goal than to help Russia succeed as a democratic capitalist country?"

Perhaps George Bush's efforts toward Russian rapprochement represent a deeper and more meaningful policy vision than his critics would have us believe. Perhaps the Beltway mavens of the left and right were wrong on this one. Perhaps Bush was right to say that the new Russia is not our enemy.

Returning from a recent trip to St. Petersburg and Moscow, talk-show host John McLaughlin argued strongly that the U.S. can do business with Putin, even to the point where a U.S.-Russian alliance would work to restrain the growing threat from China. This is a bit too much Nixonian Cold Warrior triangulation for me, but it's an interesting thought nonetheless.

Russian-style capitalism has a long way to go if it is to become a true force in the world. More deregulation, legalizing private-property rights, greater respect for human rights, and freedom of speech in the media -- to name but a few issues -- still must be resolved. But it looks like we can do business with the Russians, and it could be the American style of business at that.

During the upcoming Group of Eight summit in Genoa, Italy, Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans will lead a delegation of U.S. business executives on a hands-on promotion of free-market reforms and bureaucratic dismantling in Russia. It may be a bit too soon for American investors to sink all their retirement portfolios into Russian shares, but give Putin & Co. considerable credit for adopting Ronald Reagan's prosperity building-blocks of tax cuts and stable money. In the current world climate of economic pessimism, the summer skies in Russia are starting to clear.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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