It’s the Substance Stupid

According to the pundits, President Bush needs to avoid the mistakes of his father in appearing disengaged on the economy. In less than 20 months, the former President went from a 91 percent approval rating at the end of the Gulf War to less than 40 percent of the popular vote in his reelection attempt. The former President looked out of touch when he held a sock purchasing photo-op, appeared amazed at the scanner at a grocery store and used language like, “message: we care.” Recent polling shows the American people think the current president is not spending enough time on the economy, so the pundits claim that President Bush risks repeating the mistakes of his father.

Let’s hope the Administration does not take the pundits’ advice. The first president Bush did not lose election because he looked out of touch. He lost because the country went into a long recession and he didn’t fix it. At the time of the 1992 election, unemployment was high and had been for quite some time. The tax increase he signed certainly didn’t help.

With two years to go before the next election, the current Administration needs to focus on substance, not style. Now is the time to enact pro-growth policies and give them time to work. It is well known that the Administration is currently developing an economic growth package that will be unveiled around the time of State of the Union at the end of January. Also well known, is that many Republicans have cautioned the Administration not to appear as favoring the “rich.” These moderates and their allies in the media think the Administration should shy away from eliminating the Death Tax or making the marginal rate reductions permanent because that appears to favor wealthy Americans.

The Administration should push for policies that spur long term economic growth. Eliminating the Death Tax will move billions of dollars away from unproductive tax shelters and back into productive assets. Rather than making decisions based on avoiding a tax, individuals will make decisions based on which investment will yield the highest return. Is that a traditional “stimulus”? Maybe not, but it makes a big difference for long-term growth.

The same is true with extending the marginal income tax rate reductions enacted in 2001. These reductions expire in 2010. By extending these reductions now, the economy can reap the full benefits of reducing marginal rates – spurring incentive to earn more and make riskier investments. In fact, accelerating and extending the rate reductions would be even better.

Some policy makers in the Administration have a negative view of cutting the capital gains tax rate. This has always been one of the bigger mistakes the Administration has made on tax policy. But their argument was that cutting capital gains might trigger a sell-off on Wall Street as investors cashed-in on their gains to take advantage of the lower rate. Unfortunately, that is no longer a problem – the sell-off already occurred and the economy needs incentives to spur investment. This is excellent time for a significant reduction in the capital gains rate.

President Bush recently won an important battle with Congress to restrain the growth of federal spending. It was a hard fought and fragile victory. But, for long-term economic growth, the Administration needs to continue the fight. With big increases in defense spending already in the works, the economy needs as many resources as possible to stay in the productive private sector. The more Congress spends on pork barrel projects, the fewer resources remain for productive investment. The biggest danger in the short run is that the Congress will pressure the Administration into an expensive unemployment extension package that includes subsidies for health insurance. Paying people not to work may be a nice thing to do, but it is definitely not an economic stimulus and should not be part of any “stimulus” package.

The political danger for President Bush is not that he appears to favor the rich. The danger for him is that two years from the now the economy has not recovered or has gotten worse. He should focus now on policies that will reduce the chances of that happening. Thankfully, if he follows that course, taking care of his political concerns will also help the U.S. economy. It is a win-win situation, no matter what the pundits might say.