New Economic Team Needs New Tax Policy

There has been much hand wringing about whether apparent new head White House economic advisor Stephen Friedman, the former Goldman Sachs partner, can be an effective spokesman for President Bush’s tax cut agenda.

I’ve been one of his sharpest critics. His association with liberal groups such as the Council on Foreign Relations and the anti-tax cut group the Concord Coalition raises obvious questions. So do his campaign contributions to Chuck Schumer and Lincoln Chafee.

The truth is however, that the only man who can persuasively sell the President’s pro-economic growth reforms is the President himself. And the good news is, although there are serious questions marks about Friedman’s free market tax cutting credentials, George W. is a true believer in the efficacy of tax rate cuts to promote jobs and growth.

It was only coincidence, but symbolic, nonetheless, that the replacement of Treasury Secretary Paul O’Neill and White House economist Lawrence Lindsey occurred at precisely the same moment when the new U.S. unemployment numbers were released for November, showing a sharp rise in the number of jobless Americans.

The new Treasury secretary, railroad executive John Snow, is a strong choice to head this key economic department. Snow, whom I have met many times, first when we worked together on Jack Kemp’s tax reform commission, is a Reaganite tax cutter who wants to stick a stake through the heart of our dysfunctional tax system. Fixing and simplifying the tax code should be a top priority of Snow.

But immediate aid to the economy is needed. George W. Bush and his chief political strategist, Karl Rove, are keenly aware that the only thing that stands in the way of this enormously popular President’s being reelected in a landslide in 2004 is a drop by the economy into a dreaded double-dip recession. Bush’s father, of course, was thrown out of office 10 years ago despite foreign policy successes because he seemed to the American people to be inattentive to the ailments of the economy. And the truth is that Bush, Sr. was guilty as charged.

What is clear is that this President wants a more aggressive economic stimulus plan to revive the 4% economic growth of the 1980s and 90s and, just as importantly, to bring the bulls back to Wall Street. He is absolutely right. No President has been re-elected in this century when the stock market has been down by more than 20% during his first term. Paul O’Neill in particular did not share the White House’s enthusiasm for a big new tax cut next year. We can be sure that his replacement will.

What should that tax cut look like? I would suggest that what is needed now is a tax cut designed to benefit workers and investors. This plan should combine the Republicans’ goal of creating economic growth incentives and the Democratic goal of offering a nice slice of the tax cut pie for middle-income workers and those out of work.

The problem with the U.S. economy is not insufficient demand by consumers-as many conventional economists have suggested. In fact, for the past year or two, the American consumer has continued to spend-and government has spent at an even more frantic pace. No, the problem is barriers to production. These barriers include over-taxation of capital and labor, over-regulation of the business sector (pages in the Federal Register have soared over the past three years), and over-litigation.

Unless these barriers are cleared away, no amount of Fed interest rate cutting or demand-side tax cuts, such as tax holidays (which is akin to dropping dollar bills out of helicopters over shopping centers), will impel businesses to produce.

If you want to see a symptom of the ailing U.S. economy, take a look at the U.S. venture capital industry, which is almost entirely dormant today. Investors don’t see the profit opportunities in new ventures. Costs are too high for new businesses, thanks to government meddling, and payoffs are too meager thanks to excessive taxes on capital investment-i.e. the capital gains tax and the dividends tax.

With that in mind, the President should endorse a tax plan that has three components.

The idea behind this three-point plan, which the White House is very much considering, is to replicate the supply side tax cut successes of Presidents Reagan and Kennedy. It was JFK who said, "It is a paradoxical truth that when tax rates are too high the economy will never produce enough jobs or enough revenues to balance the budget."

Deficit hawks in both parties will no doubt squeal that this tax plan is unaffordable and will run up the national debt. They are wrong. What Kennedy and Reagan and now George W. Bush understand clearly is that it is the absence of economic growth that causes runaway budget deficits.

George W. Bush is riding high now with voters. He needs to translate this popularity into pro-growth, pro-free market legislation immediately. And he needs to sell that message to the American people himself-not through surrogates.

If Bush succeeds in the economic arena and can lead with the same tenacity that he has in the realm of foreign policy, he has an opportunity to be one of the most successful Presidents in American history. And he will avoid his father’s sad fate as a one-termer.

FRIEDMAN-FUNDED DEMOCRATS
President Bush's new White House economic advisor, Stephen Friedman, has contributed to many liberal Democrats.