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Press Release

    Democratizing capitalism

    02/15/2002

    Remarks prepared for delivery by Jack Kemp, Co-Director, Empower America, to Investor's Business Daily's Second Annual Conference, "2002: A Business and Economic Outlook" at the Ronald Reagan Presidential Library, February 15, 2002

    GREETINGS

    Ladies and Gentlemen and distinguished guests, it is an honor and a pleasure for me to speak to you today at this second annual conference on the economy sponsored by Investor's Business Daily and The Ronald Reagan Foundation and Library. Let me begin by thanking our hosts this afternoon, Mark Burson of the Reagan Foundation and Wesley Mann and Bill O'Neil of IBD. What a great conference it has been. I was privileged to speak at last year's conference, which celebrated Ronald Reagan's 90th birthday, and I must say, Mark, Bill and Wes, this year's conference in every respect has lived up to the very high standards it established.

    All of the speakers were fabulous, and even the economists were good.

    THE GIPPER AT 91

    It is also my privilege to honor the memory of one of the greatest presidents, if not the greatest president, of the modern era in American history-Ronald Wilson Reagan. On February 6, Ronald Reagan turned 91 and became the oldest living president in U.S. history. Due to his illness, President Reagan may not be able to remember all the great things he did for this country, but we do. Someday Ronald Reagan will leave us, but his ideas remain immortal. The best way to honor Ronald Reagan is by advancing his vision and fulfilling his hope, at home and around the world. When Ronald Reagan assumed the Presidency, our nation was in crisis. Many people had lost confidence in America. At home, we were in an economic crisis few people understood and even fewer knew how to remedy-stagflation. Internationally we confronted an aggressive Communist foe in the Soviet Union and fanatical Islamic theocrats had taken over Iran and imprisoned 52 Americans in our own embassy for almost 15 months.

    President Reagan had the courage to call Soviet Communism what it was-an Evil Empire-and he had the vision of how we would deal with it: "The West will not contain Communism," Reagan said, "it will transcend Communism. We will not bother to denounce it, we'll dismiss it as a sad, bizarre chapter in human history whose pages are even now being written."

    On the domestic front President Reagan saw the roots of the economic crisis clearly through a lens of classical economics while the vision of most professional economists remained distorted by the Keynesianism prescription of soft money and high taxes. Ronald Reagan proposed a combination of low tax rates and hard money. He offered a program for economic recovery consisting of across-the-board tax rate reductions, regulatory relief and a sound and stable dollar, and he saw it through to enactment and implementation. When President Reagan left office the top marginal tax rate was 28 percent, the economy was growing robustly, and revenues were increasing at eight percent a year.

    Despite President Reagan's tremendous legislative and policy victories, perhaps his greatest gift to the country has been what George Will called "his soaring sense of the possibilities." It is often said that President Reagan had vision, but that doesn't mean much if a president doesn't have the courage to act, often against popular opinion, to see it through. As Peggy Noonan observes in, When Character Was King, President Reagan's character gave him the courage to act on his vision and make it come true.

    INTRODUCTORY ENDNOTE TO A CONCLUDING KEYNOTE

    A keynote speaker is usually expected to set the tone, identify the themes and generally lay the groundwork for all the speakers to follow him. But Mark, Bill and Wes decided to reverse the order today so it's up to me as the "Closing Keynote Speaker" to pull things together after the fact. I will do that in just a moment. But if you will indulge me, as you can probably tell from my introduction, I want to do more than summarize what we've already heard today about the state of the economy. I want to charge us all, if I may, with the responsibility of doing whatever we can to carry Ronald Reagan's Lincolnian vision for mankind beyond these walls into a world that badly needs to see that vision once again.

    President Reagan and Abraham Lincoln share more than a common month of birth in February. They also share a vision of the "American Dream." Both great men understood that the American Dream is not confined to one class or one color or even one nation. It is the most powerful force for economic growth, wealth creation, and emancipation in human history. They believed that with the right policies, we could look forward to the promise that poverty as a permanent condition of mankind can be overcome.

    There have been a lot of social experiments over the past century and a half, and the results are in. Only a democratic capitalist system can give people access to capital that eventually lifts them out of poverty and misery. After more than 150 years of Marxist confusion on the subject, there can be no doubt that owners of capital and workers are not different people with conflicting interests, but the very same people at different stages of their lives. Of course Lincoln and the American Founders understood this from the very beginning. Listen to what the Great Emancipator said on the subject:

    I take it that it is best for all to leave each man free to acquire property as fast as he can. Some will get wealthy. I don't believe in a law to prevent a man from getting rich; it would do more harm than good. So while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else. When one starts poor, as most do in the race of life, a free society is such that he knows he can better his condition; he knows that there is no fixed condition of labor for his whole life.

    That's the vision-liberal democracy on a foundation of capitalism-that needs to be rekindled in America and around the world:

    ECONOMIC OUTLOOK

    The topic today has been the business and economic outlook for 2002, and we have been concerned largely with questions like why are we in a recession, how soon will the recovery begin and how strong will it be when it does?

    For all of the differing perspectives expressed here today, there seems to be general agreement, albeit disputed by some, on the following points:

    · The recession was created by deflationary monetary policy and exacerbated by a tax code that is not fit for a 21st-century economy; · The economy is either beginning to recover or soon will. · The deflation appears to be abating but the recovery is far too tepid, and the Fed can easily derail the recovery if it doesn't scrap its operating procedure of interest rate targeting in favor of a commodity-based price rule. · Congress has embarked on another spending binge that is squandering the surplus, which is a real tragedy because that surplus provides the political lubricant to do fundamental tax reform and to convert pay-as-you-go Social Security into a true personal investment retirement program for workers. · Instead of "Reaganonomics," today we've got "Rubinonomics," named after former Clinton Treasury Secretary Robert Rubin, who is emerging as an advisor to both political parties and the Fed. As long as "Rubinonomics" remains the predominant economic framework, it will be difficult to impossible to achieve further tax rate reductions or reforms.

    One could almost hear the audible sighs of relief among supply-siders the last two weeks as the price of gold rose to $325 and then settled back down to hover around $300. Commodity prices too have begun to rise, and the dollar not only has ceased its ever-onward march up against other major currencies but also has begun to weaken somewhat in foreign exchange markets. Taken together, these are indications that the deflationary spiral has abated. The dollar scarcity that created this recession may finally be over, for make no mistake, this recession has "Made at the Fed" stamped all over it. And, mark my word, even if the deflation has abated, there are still many price adjustments yet to work their way through the economy, which will exert a deflationary drag on the recovery and eventual expansion for some time to come.

    The supply of liquidity today is closer in balance with the demand for liquidity than it has been for a long time but the Fed doesn't deserve the credit. It is pure serendipity, and this long-overdue happenstance will be short-lived unless the Fed changes its operating procedure from interest rate targeting to a price rule.

    In addition to the ever-present threat of the Fed mucking things up again, Rubinonomics has become a specter hovering over not only the domestic economy but also the word economy. Rubinonomics-our own domestic version of IMF-style austerity economics-was succinctly summed up by Senate Majority Leader Tom Daschle several weeks ago in a speech when, flanked on stage by Mr. Rubin himself, Senator Daschle made the following bizarre claim: "Not only did the Bush tax cut [which did not even began it's slow five-year phase-in until July] fail to prevent the recession [which started four months earlier in March] but it probably made the recession worse" [which would be the first time in recorded history a tax cut ever caused or exacerbated a recession].

    Now, some words and phrases are simply too obscene to utter in polite society. "Tax increase" is one of them. Therefore, Senator Daschle speaks in code. So when you listen to him speak, you must have the key to the code to understand what he really means. Senate Republican Leader Trent Lott provided the key to deciphering Daschle-Speak when he observed that whenever Daschle says "fiscal discipline," he really means "high taxes" or "tax increase."

    With this in mind, here, decoded, is Tom Daschle's rendition of "Rubinonomics":

    "'Tax increases' lowered our long-term interest rates and increased business confidence, which helped spark new investment, which produced strong economic growth, which lowered the deficits even more, which reduced long-term interest rates even further, which created more jobs and stronger economic growth."

    Wow! I'm reminded of the old saw that "it's not what we don't know that hurts us so much as all those things we think we know that just aren't true."

    And you know what's scary? It's not only the Democrats who believe this nonsense. All too many Republicans these days, I'm sad to say, accept the premise of Rubinonomics. They don't want to raise taxes but they are afraid to cut them by any significant measure for fear of running deficits and running up more debt. They've forgotten the Reagan experience.

    There are other clouds on the horizon as well. Protectionism is rearing its ugly head-from tariffs and quotas to protect the steel industry to gargantuan farm subsidies that not only obstruct open trade but also put undue strain on the federal budget.

    And worldwide, we continue to see the enormous economic cost, especially in developing countries, of trying to run a global economy under a regime of floating fiat currencies. The world needs a monetary anchor, and it is up to the United States to lead the way. If we would provide monetary stability by managing the dollar with a commodity price rule then the rest of the world would have a lodestar to guide it. There would be a stable monetary anchor that the rest of the world could rely on without having to "float it alone" or anchor to a floating dollar and subject itself to the vagaries of whatever monetary errors the Fed is making at the time. Ask Argentina what that means.

    But there is an opportunity here. House Majority Leader Dick Gephardt has called for "tax cuts that promote growth and prosperity for all Americans and has urged President Bush to hold an economic summit "to figure out how we're going to help businesses create jobs, reduce the deficit, simplify the tax code and grow our economy." I hope the President takes him up on the idea. Such a meeting would provide an opportunity to discuss these issues and compare the competing economic paradigms: Reaganonomics vs. Rubinonomics.

    For example, an economic growth summit would allow us to rebut the class warfare that is being used to prevent policy changes that would help the poor the most. Capital gains taxes, of course, are a classic example. We need to cut capital gains taxes to create more wealth and more jobs. The capital gains tax is not a tax on the rich, it is a tax on the poor who want to get rich; it's not a tax on wealth, it's a tax on the creation of wealth. The capital gains tax doesn't bring additional revenue into the treasury, it depresses revenues from all other sources.

    NEW WORLD DISORDER

    As we sit in this marvelous facility discussing the economic and business outlook for the United States, the world is in crisis. President Bush put it best in his State of the Union Address: "Our nation is at war, our economy is in recession, and the civilized world faces unprecedented dangers."

    The President went on, "Yet the state of our Union has never been stronger." But ladies and gentlemen, for all of our strength, the state of the world has seldom been more uncertain.

    Aren't we fortunate to have George W. Bush and his great team of Dick Cheney, Don Rumsfeld, Colin Powell and Condoleezza Rice standing at the helm during these troubled times?

    We fight an enemy we can't identify; who hides in the shadows and infects other nation states like a virus; an enemy who practices asymmetric warfare that has a way of turning our greatest strengths into weakness; who cannot be deterred because he values a martyr's death above everything else in the world; an enemy who, no matter how many nation states we crush with smart bombs and daisy cutters, can always find a cave in the remotest regions or a hovel in the dark urban underworld beyond the reach of governments.

    If we are not careful, we will end up like the man who has no idea where he lost his wallet but insists on searching under the street light because that is where the light is. As Reagan did in 1980, it is time to think anew about the crisis we confront and refrain from the very human temptation to force strange new problems into the Procrustean bed of old familiar solutions. Again, it's not what we don't know that hurts us nearly so much as all those things we think we know well that simply aren't true.

    LEARNING FROM EARLIER MISTAKES IN AFGHANISTAN

    There is near unanimity that by "abandoning" Afghanistan after the Soviet defeat there the West permitted the infestation of the country by al Qaeda terrorists and the rise of bin Laden's puppet government, the Taliban. The lesson we learned from that episode is, "don't make the same mistake twice." The question is, however, what exactly was the nature of our "mistakes," and what precisely will it mean for the West to "stand by" a post-Taliban government.

    One mistake is clear. We pulled out of Afghanistan without imposing civil order and disabling the criminal elements that kept the country in violent turmoil. We failed to break the back of the criminal gangs led by thuggish warlords who are temporarily for sale to the highest bidder; whose sole objective was, and remains, to plunder the country and grow, harvest and sell poppies for the production of opium, Afghanistan's only real cash crop.

    The war against terrorism in Afghanistan will not end until the warlords are broken. The peace will not be won until the interim government can operate on its own. We should give the warlords a choice: Break connections with Iran and other foreign powers, disband your armies and cooperate with the new government at the regional level or you and your foreign sponsors will face the same fate as the Taliban.

    But once order is achieved, what's next?

    At one end of the spectrum, Doug Bandow of the Cato Institute contends our only vital stake in Afghanistan is to end the Taliban's support of the al Qaeda terrorist network. Beyond that, he says, America has "no stake in attempting to construct a new regime in Kabul," which he labels a "fool's errand."

    Senator Joe Biden, on the other hand, argues for ambitious "nation building" and financial aid sufficient to change the economic and social climate in the region and establish democratic and capitalist institutions. In international confabs, the term "nation building" usually means lots of Western financial aid to pay Afghani civil servants in a strong new central government and to pay foreign companies to build "infrastructure" as well as coerce IMF "client" nations into floating their currencies and imposing punitive tax systems.

    If nation building is the snare and delusion of social engineers as Brenner and Bandow suggest-and, up to a point I think they have a point-and, if we can't afford to walk away from Afghanistan again-which we can't-what is to be done?

    DECMOCRATIZING CAPITALISM

    Securing the peace will require more than killing the terrorist virus; it will require immunizing host countries once cleansed against further infection. And let me be clear, the only sure inoculation against the terrorist virus is freedom which when given time to work will create a powerful array of antibodies against terrorism and the religious and secular ideologies that tyrants seek to impose-landowners, homeowners, business owners and workers with jobs.

    We don't need to "nation build" in Afghanistan so much as capitalize democracy. There exists a model of how to do it.

    Reuven Brenner, one of the most insightful economists on the scene today, observes that "politicians and economists promise growth, prosperity, higher standards of living" but do they really know how to bring them about? While government-subsidized historians and economists like to perpetuate the myth that foreign aid and economic plans drawn up by technocrats and academics can "build nations," the empirical record belies the claim.

    Brenner is persuasive when he argues there are a few common elements unrelated to aid, planning and economic fine tuning that account for all of the "economic miracles" of national development over the past 400 years, from the Dutch Miracle of 17th century Europe to the 18th century Scottish Miracle to Hong Kong and Singapore in 19th century Asia and the United States in North America, and of course Germany's and Japan's rise from the ashes of World War II.

    · Religious tolerance that created a welcome environment into which immigrants were willing to risk bringing their families along with their skills, knowledge and capital; · Low taxes; · Sound Money; · Sound private property rights protected by the rule of law; · Minimal government involvement in regulating commercial activities and markets, especially financial markets; · Open Trade.

    AFGHANISTAN: THE OPPORTUNITY

    First, while some aid will be necessary, we know that open trade is far more important than foreign aid. Start with the most urgent needs, direct aid where we know it will be effective, and then help the new Afghanistan government implement long-run policies we know will work. I agree with the Bush Administration that any direct foreign aid should be precisely targeted to "quick impact" efforts in the areas of health, education and agricultural projects.

    Second, the US and EU should establish a free-trade zone with zero or at least very low tariffs on agricultural products and textiles, which currently average 17 percent in the U.S., or three times the tariff on manufactured products. This would create incentives for farmers and help fledgling industries.

    Third, we can help Afghanistan feed itself and at the same time undermine a major source of funding for the international terrorist network by devising a way to replace the poppy fields with wheat fields. The poppy used for opium production not only is the sole cash crop of Afghanistan today but also a currency the way tobacco was in colonial America. It has been estimated that purchasing the poppy crop to be harvested this March would cost $100 million. The US should purchase this year's crop for cash and provide seeds to the farmers who sell it so they can plant next year's food crop, under the proviso that another poppy crop will not be tolerated.

    The UN estimates that it would take $250 million in aid to help farmers to switch from opium to food crops. If accurate, that would be a small price to pay to eliminate a major source of revenue for would be terrorists and to vanquish the source of 75% of the world's opium supply.

    Fourth, we should assist Afghanistan, as we assisted Japan, to create a functioning administration to govern the country. We should draw upon the American constitutional experience to help Afghanistan's modern founding fathers create a "federalist" government of semi-autonomous states that will accommodate the country's great diversity within a coherent structural framework.

    Fifth, we should assist Afghanistan implement Lincoln-style Homesteading. Parcels of land could be distributed to people who agree to settle and farm the land, and not only should they receive the surface rights to the land but also the subterranean mineral rights as well.

    President Lincoln knew that homeownership and specifically property rights were the keystone to the American Dream. It was his vision that giving people a stake in their community would allow America to take advantage of its vast underutilized space across the prairies. Today, using the same vision we can help Afghanistan plant the seeds of economic growth by helping the new government establish a Homestead Act for Afghanistan.

    Perhaps the most compelling case for land ownership as a mechanism of social stabilization came from Russian Interior Minister Peter (Pyotr) Stolypin when presenting his proposal for peasant land reform before the Russian Duma in 1905. "It is the peasant's lack of land of his own," Stolypin said, "that undermines his respect for other people's property." Aleksandr Solzhenitsyn elaborated on Stolypin's Duma presentation in The Red Wheel:

    'The desire for property is as natural as hunger, as the urge to continue one's kind, or as any other inborn characteristic of man,' and it must be satisfied. Peasant ownership of land is a guarantee of order in the state. The peasant without land of his own lends a ready ear to false doctrine, and is susceptible to those who urge him to satisfy his desire for land by force. The substantial peasant on land of his own is a barrier against all destructive movements, against any form of communism, which is why all socialists are so desperately anxious not to see the peasant released from the slavery of the commune, not to let him build up his strength.

    Sixth, agrarian land reform can have a broader purpose as well. It can provide the template by which to create a coherent system of property law in a land where confusion and contradiction reign supreme. Today, if one wanted to know about a valid purchase of property they would be required to check colonial law, Islamic law and local tribal law or custom -- if they could find any documentation -- which may require additional baksheesh.

    As Hernando de Soto makes clear in, The Mystery of Capital, what separates rich countries from poor countries is not individual savings or ownership per se, but rather "the establishment of widespread property law and the conversion process in that law that allowed them (rich countries) to create capital."

    Currently, in Afghanistan, like many other poor countries De Soto has studied, "people have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to reproduce sufficient capital to make their domestic capitalism work."

    Farmers free to own and till the land will help provide stability for the government and increase the efficiency of the farming sector and hence, increase production and standards of living for farmers.

    Seventh, the United States might also consider assisting Afghanistan in conjunction with Western banks to capitalize a private national bank in Afghanistan, which would be privately owned and authorized to issue currency. We could assist Afghanistan do for itself what Alexander Hamilton showed America how to do at its founding: put government debt to work for the country as the basis of a sound currency. A private Afghani national bank, like the Bank of America, could be capitalized by an association of private investors along with deposits from the government of hard currency borrowed in the marketplace. The loans issued by the bank in the form of bank notes would serve as the currency fully backed by hard-currency deposits in the bank.

    Alternatively, we could work with the Afghani people to help dollarize the economy or establish a currency board that would back a new Afghani currency with dollars or euros. The point is to think outside the box, and under all circumstances we must insulate Afghanistan from the poisonous demands of the IMF to issue a floating fiat currency and impose a punitive tax regime.

    The fallacy behind the IMF's demand for fiscal austerity and high tax rates is the mistaken belief that large amounts of government spending are necessary to drive economic development. The IMF model assumes that unless high taxes are imposed to pay for all of this government spending, government deficits will reduce national saving and in turn depress economic growth.

    The fact is, once government spending exceeds the basics, far from driving economic development, government spending very quickly becomes a drag on economic growth, especially if punitive taxes must be levied or huge amounts of money borrowed to pay for it. Moreover, just because saving in poor countries doesn't take the form Keynesian economists are able to quantify in their income and product accounts doesn't mean poor people don't save. De Soto points out the fallacy that government has to save on behalf of people by taxing them to death: "Even in the poorest countries, the poor save. The value of savings among the poor, is in fact, immense."

    The problem is, De Soto concludes, poor people in these economies "hold resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them." In other words, without a strong rule of law and a system of recording and protecting property rights, saving cannot readily be transformed into capital.

    Finally, we can help Afghanistan design a pro-growth tax system as President Putin did in Russia. Rejecting IMF "advice," President Putin and the Duma enacted sweeping tax reform to revive Russia's anemic economy by lowering the tax burden and implementing a 13 percent tax rate on individuals and a 23 percent tax rate on corporations. The single, low-rate tax was designed to stimulate production, broaden the tax base and encourage economic growth, and it has worked like a charm. It would work like a charm in Afghanistan as well if a 10 percent tax were levied on a neutral tax base without discouraging saving, investment and risk taking by taxing it multiple times.

    President Putin has learned what President Kennedy did almost forty years ago and what many members of the U.S. Congress have yet to figure out: "It is a paradoxical truth that tax rates are too high and tax revenues are too low." And, I might add, the best way to maximize economic growth is to remove obstacles and reduce the cost on the factors of production-labor and capital.

    CONCLUSION

    Today, Afghanistan is free from foreign tyranny and terrorist oppression. Grave danger remains, but a window of opportunity is at hand. The people of Afghanistan have a new sense of hope that has been lost for more than a generation. Today, we have provided the foundation of a vision that can bring the hopes of the Afghani people to life. If we have the courage and leadership to put these policies into action, we can make this vision-Abraham Lincoln's vision and Ronald Reagan's vision-a reality.

    While we aren't at the end of history, there is ultimately no alternative to the liberal democratic ideal and the capitalistic organization of human economic activity around private property and free markets. That's the lesson Ronald Reagan taught us in the early 1980s and the lesson America must provide the word in the 21st century.

    Thank you.