Yikes!! Fiscal Responsibility!!!
Jude Wanniski
December 27, 2004


Memo To: Jim Carville, Democratic philosopher
From: Jude Wanniski
Re: The Old Republican Playbook.

After the across-the-board defeat of the Democratic Party on November 2, you seemed serious about the need for your party’s elders to re-examine the ideological foundations of the party. As a onetime Democrat who switched to the G.O.P. in 1978, at a time when Republicans were seriously re-examining the party ideological foundations, I thought you showed considerable wisdom in your remarks on Meet the Press that first Sunday after losing the White House and both houses of Congress. I was so impressed, Jim, that I even gave you a call and offered to help you find your way. You did at first seemed interested, but I haven’t heard back and must assume you figure the exercise isn’t really needed. Or if it is, you may think there’s no point in listening to what a Republican might contribute to your party’s makeover.

In any case, I might as well stick my nose into it, as I see you are getting no help from your party’s intellectuals, especially when it comes to economic policy. Senator Kerry could easily have defeated President Bush’s re-election bid. He came within 2% of the popular vote of doing so. If 60,000 Ohioans had voted for Kerry instead of Bush, you would still have lost Congress, but the Senator would now be working on his Inaugural address. My contention is that Kerry lost on the economic issues, primarily because he and his advisors were stuck with “Fiscal Responsibility” as their economic mantra. You may not remember, but “Fiscal Responsibility” were the two most dreaded words in American politics back when the G.O.P. claimed it in its losing playbook. When the voters heard the words emanate from a political candidate, they automatically translated it into “tax increase.”

What’s happened is that since Ronald Reagan scrapped that playbook in favor of the new Republican mantra, “Economic Growth,” the G.O.P. has been winning elections and the Democratic Party is promising “Fiscal Responsibility.” Notice, Jim, that I did not say your should follow the G.O.P. mantra of “Tax Cuts.” The voters did not flock to Reagan because they wanted to pay lower taxes. They wanted Economic Growth, non-inflationary Economic Growth that would permit the economy to generate more tax revenues to finance public goods and services!! Tax changes are only the means to an end.

So here you are, still stuck with the G.O.P.’s tattered old playbook, and instead of figuring out what’s wrong, you’re team is getting worse. In case you did not see it, here is the Washington Post’s lead editorial on Christmas Eve. I could not believe it when I read it, but have concluded that the Grinch himself has become chief economic editorial writer for your Party's favorite newspaper. It is so much neo-Keynesian gobbledegook -- which normally is so muddled the paper’s Democratic followers can’t make sense of it anyway. But here on Christmas Eve, the editorial calls for AN ECONOMIC SLOWDOWN!! For goodness sakes. Please read it carefully and remember your 1992 slogan, “It’s the Economy Stupid!!” If you really want to help your Party win some elections, you can give me a call. I will try to help, pro bono, as always.

The Holiday Spirit
December 24, 2004

THE HOLIDAY SEASON has suffused the stock market, which has bubbled exuberantly to its highest level in 3 1/2 years. Americans who own stocks can count themselves a bit richer, which means they can spend a bit more freely, which means that corporate profits will brighten -- which means that the stock market might just keep heading up. But this perpetual motion machine has a flaw in its engine. The more it accelerates, the nastier the potential consequences if it seizes up.

The flaw is that American consumption is based on borrowing: People are spending money that they don't actually have. The nation's net borrowing from foreigners has risen to a massive 6 percent or so of gross domestic product, up from 4 percent in 2000, a level that was then considered dangerously high. The more consumers fling credit cards around this holiday season, the bigger will be the savings deficit -- and the greater the crunch if foreigners tire of lending the money needed to keep the machine humming along.

Raghuram Rajan, the International Monetary Fund's chief economist, discussed this conundrum recently in the (London) Financial Times. As an international civil servant, he sought not to be alarmist: America's unsustainable dependence on foreign savings could be corrected, he argued, so long as global policy took three sensible steps. Europe and Japan should boost growth through a mixture of structural reforms, lower interest rates and budget deficits: This would suck in extra U.S. imports, boosting American incomes and so cutting the country's dependence on loans. China and Southeast Asia should allow their currencies to rise against the dollar, so boosting U.S. competitiveness: Again, higher U.S. earnings would cut the need to borrow. The United States, for its part, should raise its savings rate by shrinking its budget deficit.

This anti-alarmist prescription is not terribly comforting. Europe and Japan may lack the political will to carry out the structural reforms necessary to boost growth. East Asians may choose to keep their currencies weak against the dollar to boost exports. And the Bush administration shows few signs of tackling the budget deficit. Despite President Bush's talk of halving it over five years, he faces large bills for the Iraq war but refuses to reconsider his enthusiasm for tax cuts.

Mr. Bush declares that his tax cuts are fueling the economy and that reversing them might slow it down. But this defense, like the stock market's holiday exuberance, seems disconnected from reality: To correct its addiction to foreign borrowing, the United States actually needs a mild economic slowdown. If savings have to rise, consumption has to fall commensurately, and lower consumption will mean lower economic growth. Mr. Bush can effect this transition smoothly via government policies -- if not by raising taxes, then perhaps by requiring extra individual savings in private accounts (those savings would have to come on top of any diversion of Social Security taxes). Or he can look the other way and wait for the markets to force an economic slowdown in their own way, and at a time that no one can predict. That latter course, which would involve a further fall in the dollar and a jump in long-term interest rates, could be considerably more painful.