THE ELECTION NIGHT returns were not even fully revealed before liberals began handing out recriminations. Across the country, Democratic activists and deep-pocket donors were devastated by the failure of party leaders to use the sagging economy to deliver a knockout punch to the Republicans. But it's not as if they didn't try. In the weeks leading up to the election, the party's three heavyweight 2004 presidential aspirants--Tom Daschle, Dick Gephardt, and Al Gore--plastered Bush for mishandling the economy and the stock market. At the Democratic economic summit on October 11, Rep.
THE ELECTION NIGHT returns were not even fully revealed before liberals began handing out recriminations. Across the country, Democratic activists and deep-pocket donors were devastated by the failure of party leaders to use the sagging economy to deliver a knockout punch to the Republicans. But it's not as if they didn't try. In the weeks leading up to the election, the party's three heavyweight 2004 presidential aspirants--Tom Daschle, Dick Gephardt, and Al Gore--plastered Bush for mishandling the economy and the stock market. At the Democratic economic summit on October 11, Rep. Charlie Rangel raged that George W. Bush is a 21st-century Herbert Hoover. The Democratic National Committee ran a TV ad in battleground states showing a pitiful, 70-something grandfather returning to work because he's lost his retirement money in the stock market. The message: This is the miserable economy Republicans have given us. Trouble is, the public didn't buy into the Democrats' "blame Bush" offensive. Polls showed voters were about equally divided on which party could better steer the economy back to prosperity. Why was that? After all, the Democrats had a point. The economy has been pretty miserable in these past two years, especially when contrasted to the high-growth and bullish Clinton years. But here is where the Democrats kept getting tripped up. What program did they favor to juice the economy? Voters never knew. If you listened carefully, you got the sneaking suspicion that they hadn't a clue. In fact, the economic prescriptions that you heard from Democratic party leaders ranged from weak to moronic. Al Gore's eagerly awaited pronouncements on the economy amounted to a grand to of one idea: extending unemployment insurance benefits. Then you have people in the liberal wing of the party, such as Ted Kennedy and Hillary Clinton, who want some old-fashioned priming of the Keynesian pump through massively increased federal expenditures. Dick Gephardt endorsed a $200 billion deficit-spending plan with more money for school construction, more money for bankrupt states, and $75 billion for complicated new tax credits. This plan would surely create jobs . . . for tax accountants and H&R Block employees. In his next breath, and with a straight face, Gephardt excoriated President Bush for running up the deficit. In sum, when it comes to fixing the economy, the Democrats are completely schizophrenic. They are arguably as confused as the feckless Republicans about what to do. But there was one idea that almost all Democrats (except those in tightly contested Senate races) agreed on: What is poisoning the economy these days is the Bush tax cut. "Our problem is that the Democrats whine and whine," fumed Democratic senator Fritz Hollings of South Carolina. "Everybody knows what the problem is. What's the solution? We say the reason for the trouble is 'We don't know.'" Then he boomed with almost comical conviction: "We do know. It's the tax cuts." Democrats also tried to pummel Republicans for wanting to gamble Social Security on the "risky scheme of privatization." Democrats in unison asked voters, Do you really want your Social Security dollars gambled on Enron stock? Now they're scratching their heads, wondering why the Social Security demagoguery fell flat with voters--especially young ones. The answer seems to be that private Social Security accounts are not just good economics. They can be a surprising political winner, too. Across the country, Club for Growth-endorsed Republican candidates--including Elizabeth Dole, Lindsey Graham, John Sununu, and Pat Toomey--defended private accounts and rightly argued that the Democratic plan to save Social Security is nonexistent. True, many cowardly Republican candidates fled from the president's plan, but many of them lost--including Connie Morella and John Thune. Indeed, many Republicans dared to touch the third rail of American politics and lived to tell about it. The anti-tax-cut message had even more devastating consequences for the Democrats. The Democrats confronted giant hurdles in persuading voters to join in their obsessive loathing of the Bush tax cuts. One is that the public likes the tax cut. Two is that there is no semi-rational economic logic in the argument that canceling the Bush tax plan could possibly revive the economy. How in the world could a tax hike now incite more job creation, more investment, or more confidence? The Democrats responded that the Bush tax cut has shown itself to be a failure and a deterrent to growth. The truth is the Bush tax cut largely hasn't happened yet. How could it have sparked an expansion when 70 percent of the $1.3 trillion cut doesn't take effect until 2004 and after? Furthermore, there aren't more than a dozen or so Americans outside of the Democratic Caucus on Capitol Hill who actually believe that terminating the Bush tax cut would somehow magically inspire an economic recovery or a stock market rally. In fact, a strong argument can be made that the Daschle Democrats' continual threats to cancel the Bush tax cut have been preventing it from having its desired effects. Supply-side tax rate cuts are an economic stimulus because they increase the rewards for saving and investing. But if it seems those promised tax cuts are going to be snatched at any moment, there's no point in assuming their existence when making investment decisions. Would you buy a car from a dealer who promised you as an inducement zero percent financing over the next five years, but then announced that after the first year, he might have to rescind the zero financing promise? Former Clinton economist Gene Sperling presents a nuanced argument against the Bush tax cuts. Sperling, who has the ear of Gore and other presidential wannabes, says that Democrats should be for deeper "temporary" tax cuts now, and lesser tax cuts later, so as to assure the markets that "fiscal discipline" will be restored. And that is important, according to Sperling, in order to hold down long-term interest rates. Here's the inconvenient problem with Sperling's analysis: The budget deficit has indeed gone up a lot over the past two years, but long-term interest rates have concomitantly fallen to their lowest levels in decades. The American economy has a multitude of potential problems right now: High interest rates is not one of them. In fact, it is instructive to note that the nation with the highest public debt of all industrialized nations today is Japan. And yet Japan has the lowest interest rates. Even after a decade of depression, the Japanese still haven't figured out that it's not interest rates, but tax rates that are too high. The only unifying message from congressional Democrats these days is that tax cuts are always and everywhere a bad idea. Hillary Clinton recently lampooned Republicans for "actually believing that tax cuts are the answer to everything." But it is Hillary and her friends who have the strange belief system. Especially irrational is their certainty that tax rates can never be too high to stifle risk-taking, job creation, or capital investment--just so long as those high taxes apply to the evil rich. They are anti-supply siders. They believe that confiscatory tax rates elicit no response from taxpayers. It wasn't always like this. During its golden era under JFK, the Democratic party was for tax cuts, and the lame-brained Republicans were the austerity-first balanced budgeters. JFK was right when he said to the Rockefeller Republicans: "An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs and enough economic growth." Not only did the 1964 Kennedy tax cut reduce income tax rates for all Americans by 30 percent--yes, even for the richest Americans--but JFK also cut the capital gains tax. Here is what JFK said about the capital gains tax in 1963: "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital...the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy." That wasn't Jack Kemp, it was John F. Kennedy. And he was right. The capital gains cut enacted by a Kennedy in '64 had a profoundly positive impact on the economy, as did the one passed by the Republican Congress and signed into law by President Clinton in 1997. From 1996 to 2000, tax revenues increased from $50 billion a year to more than $100 billion a year. The venture capital funding for new high-tech firms that are major innovators and employers of high wage workers in America more than doubled. The stock market soared. Why not marry a new investment tax cut with a 2-percentage point reduction in the payroll tax to provide a demand and supply-side incentive for more hiring? Former senator Pat Moynihan has suggested this in the past. The payroll tax cut would surely do more to put Americans back to work than extending unemployment welfare benefit checks for another 26 weeks--an idea that will unquestionably reduce total employment. As a token Republican economist attending the Democrats' "bash Bush" economic summit, I suggested this very policy, but there were no takers. The Democrats fear that a round of tax cutting will drain the treasury of dollars essential to fund vital public services. Just the opposite is true. The federal deficit and the budget problems in the states are a consequence of too little economic growth. If we can get back to a 4 percent economic growth rate for the nation, the federal revenues over the next decade will grow by nearly $2 trillion more than they will if economic growth remains at 2 percent. But none of this economic logic penetrates the Democratic mindset on Capitol Hill. Instead Democratic leaders, notably Nancy Pelosi, are still delivering the delusional message that Democrats lost because they didn't attack the Bush tax cut vigorously enough. And it is precisely because of this message, that, despite the weak economy, the vacuous, uninspiring domestic agenda of many Republicans, and the history of large congressional gains in off-year elections by the party out of power in the White House, the voters handed the Democrats a richly deserved electoral catastrophe. Stephen Moore is president of the Club for Growth and a senior fellow in economics at the Cato Institute.
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