"Been Down So Long It Looks Like Up To Me'

Copley News Service, 1/23/2002

Widespread talk of an imminent and robust economic recovery is now being tempered by the sobering reality that the economy is far from out of the woods, and the recovery, when it finally does arrive, may well be rather lackluster. On Jan. 11, Fed Chairman Alan Greenspan announced, “It is still premature to conclude that the forces restraining economic activity here and abroad have abated enough to allow a steady recovery to take hold,” which is Greenspanese for, “Whoa, hold your horses.” Economic statistics suggest that the economy remains in a deflationary contraction. Despite the hype about a so-called “V-shaped” recovery, the only “V” in sight is the rebound from 9-11 to the depressed level we were at the day before.

Now comes Sen. Ted Kennedy with the strangest idea I’ve heard since Senate Democratic Leader Tom Daschle said two weeks ago that President George W. Bush’s tax cut caused the recession and is making it worse by creating a deficit. But give Kennedy credit for honesty; he says forthrightly what Daschle won’t say, namely that we should increase taxes.

If Kennedy wants to repudiate his brother President John F. Kennedy’s legacy of cutting tax rates across the board to get America moving again, I think someone should defend that heritage. Maybe Bush should challenge Kennedy to a debate: Kennedy can defend his thesis that tax cuts created the recession, are making it worse by creating a deficit and that a tax increase is the solution to reviving the economy. Bush could defend the thesis of Presidents Kennedy and Ronald Reagan that recessions create deficits, that across-the-board tax rate reductions get the economy growing again and turn deficits into surpluses.

The problem with Kennedy’s argument is that it confuses tax rates with tax revenues. He makes a fundamental error that his brother John did not make in 1960-61 when he urged the Congress to cut tax rates across the board by 30 percent. Congress did finally cut tax rates, and revenues increased, which proved President Kennedy right when he said:”It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates now. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

Ted Kennedy and Tom Daschle are not alone in their confusion; most analysts remain perplexed about the economy. Washington Post columnist Michael Kelly wrote recently that “Most economists don’t understand this peculiar recession especially well. We know this because most of them didn’t predict it, which wasn’t surprising because most didn’t understand the preceding boom, either.”

Amidst the confusion, however, a small group — Brian Wesbury, Larry Kudlow, David Malpass, Alan Reynolds, David Gitlitz, George Gilder, Richard Rahn, Lawrence Hunter, Jude Wanniski and I — got it right, both on the boom and on the recession. In retrospect, this group had a pretty good understanding that the economic boom sprang from an unleashing of investment, risk-taking and productivity growth made possible by tax rate reductions, tariff reductions, deregulation, government spending restraint and the blossoming of the Internet and other advances in high tech.

We also debunked the prevailing myth of the era that the boom was a mixture of “fiscal discipline” and “irrational exuberance.” We never bought the nonsense that “fiscal discipline,” aka tax increases and debt reduction, lowered interest rates and produced the only “legitimate” increases in investment.

Nor did we believe that irrational euphoria and blind greed misdirected markets and inflated the economy into a speculative bubble of “extravagant” investment, causing the economy to grow “too fast” and the stock market to fly “too high.” And we repeatedly warned, to the point of making pests of ourselves, that Greenspan would bring the new economy crashing down if he persisted in a deflationary monetary policy grounded in these myths.

In retrospect, this cadre of folks can claim some measure of credit for having demonstrated insight and foresight on the economy that most analysts lacked. That surely doesn’t entitle them to have their opinions accepted without question in the future, but it should earn for them a special hearing today as they offer opinions on what it will take to restore growth and prosperity, not only to this country but also to the entire world. The recession is a global recession, and it was created by deflationary monetary policy here in the United States.

To ensure a robust economic recovery, the Fed must change its operating procedure and stop targeting interest rates — before it gets them all the way to zero without solving the problem as happened in Japan – and begin using a commodity price rule to reverse the deflation. Congress and the administration must cut tax rates across the board even more than they did last year, cut the capital gains tax rate and reform the tax code to remove the tax penalties on work, saving, investing and risk-taking to get the economy moving and restore surpluses.

As for the Kennedy brothers, history demonstrates that John was right and Ted is wrong.