Enron Mail

Subject:KUDLOW'S TAKE -- National Review Online Financial -- September 7,
Date:Fri, 7 Sep 2001 13:52:57 -0700 (PDT)

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by Lawrence Kudlow

No news is bad news as far as Wall Street is concerned.

President Bush came outside the White House at 3 p.m. Friday afternoon to
talk about the devastating job report published in the morning. The report
had recession written all over it -- including the highest unemployment rate
in four years. Bush stood in front of the podium, flanked by House Speaker
Denny Hastert and Senate Republican leader Trent Lott, and showed some
Clinton-era "I feel your pain" in a discussion of the nation's deteriorating
economy. The trouble was, the president had nothing new to say.

Though both Lott and Hastert are proposing a capital-gains tax cut to lift
business investment out of its doldrums, the president never once mentioned
cap-gains. Instead, he repeated his mantra that the new budget under
discussion must be disciplined, the so-called Social Security surpluses must
not be invaded, and his energy plan should be passed.

Because he announced no new stimulus, stock markets sagged as the
presidential news conference went on. No news is bad news as far as Wall
Street is concerned.

The economic story is turning out far worse than anyone expected at the Fed
or the administration. Stock markets are looking for some supply-side relief
to lower the tax cost of production and investment, and improve incentive
rewards for capital risk taking. But nothing is forthcoming in the way of
new presidential policies.

One key reason for the lack of new tax initiatives is that top presidential
advisors do not agree with Lott and Hastert. Treasury Secretary Paul O'Neill
is travelling through the country telling folks that he doesn't believe
cap-gains relief will promote economic growth. Earlier in the year, he
argued that corporations don't adjust their planning on the basis of tax
policy. Last week, he asserted that the nation cannot afford a cap-gains
cut, despite decades of historical evidence that revenues rise when the
cap-gains tax rate falls.

Top Bush economic advisor Larry Lindsey has not ruled out a cap-gains cut,
but Lindsey continues to tout the consumer tax rebate as a demand-side
measure to stimulate growth.

The Bushies are not entirely to blame for the policy stalemate in
Washington. Leading Democrats such as Senate budget committee chairman Kent
Conrad, lately joined by Sen. Hillary Clinton, have been ranting and raving
about protecting Social Security surpluses. This time-tested Democratic
Social Security scare tactic, normally reserved for the waning days of an
election, has been hauled out in the middle of the worst stock market in
nearly 20 years.

Daschle, Conrad, Clinton & Co. are arguing that declining budget surpluses
are causing the economic slump. Factually, however, the true causality is
exactly the reverse. You don't have to be a supply sider to understand that
it's the slumping economy with fewer people working that is bringing down
the surplus.

But there's a way around this rhetoric. The Bush administration has to get
to work by reaching out to Democratic tax cutters like Zell Miller and John
Breaux to create a bipartisan coalition that will go behind the back of the
Democratic leadership in order to rescue the economy.

Without a supply-side plan to promote capital formation and more generous
equipment expensing allowances, stock markets will continue to rely on the
next round of Fed easing for any relief. Incredibly, not a peep was heard
from the central bank after Friday's disappointing unemployment report. The
Fed needs to drop its policy target rate by 50 basis points immediately, and
then come back with another 50 at their next meeting in October.

Unfortunately, Washington continues to fiddle while the stock market and
economy burn.