Thanks. What a Gift!
The Democrats have given. And now they will receive.

Tom Nugent is Executive Vice President & Chief Investment Officer PlanMember Advisors, Inc.
December 21, 2001, 8:00 a.m.

ow, an early Christmas present from the Democrats to the Republicans — the outright Democratic abrogation of the president's stimulus package to lift the U.S. economy out of recession! What a great gift to help the Republicans retake the Senate in 2002.

In large part, this is a political gift because of one critical item in President Bush's stimulus plan: Democrats specifically objected to cutting tax rates on hard working middle-class Americans — even though it was only a measly two-percentage-point drop in the marginal tax rate from 27% to 25%. On the other hand, the Democratic alternative insured that the government would give away as much tax money as possible to what just happens to be a major constituency of the Democratic party: those who don't work.

Now, what hard working American in their right mind would vote for a politician who loves keeping taxes high?

Another reason that the Democratic resistance to the fiscal stimulus package is an early Christmas present for the Republicans is because it creates the same circumstances that Bill Clinton's tax increase in 1993 did for Republicans in the 1994 elections. Hard working Americans were fed up with tax increases such as the Clinton confiscatory tax increase back then, and they made sure that the Democrats got the bum's rush when they ran for re-election in 1994. Fortunately for Republicans, most Americans are hard working and understand incentives. When they see how deep they have to dig to keep the wealth redistribution schemes of many Democrats rolling, they will choose the Republican option: growing the economy to create more jobs through incentives.

In the 1994 elections, the Republicans forged an alliance among virtually all Republican representatives called the "Contract with America." This contract was a series of promises that the Republicans made to Americans that if they gained control of the Congress they would work as hard as they could to get these promises passed into law. And, after sweeping the elections for both the House and the Senate, they followed through.

For the Republicans to insure victory in 2002, they must also follow through by instituting a plan with specific promises that will guarantee an economic recovery. The American people respond to honesty and commitment. They don't endorse back-room wheeling and dealing where the pork is cut up for private-interest groups.

The refusal by House Democrats to endorse the president's fiscal-stimulus package will prolong the lag in the U.S. economy. Indeed, any recovery may well be put off until 2003 at the earliest. The related rising unemployment, falling stock prices, and continuing declines in economic output will be the kindling for a Republican plan to retake the Senate and increase their majority in the House of Representatives in the November 2002 elections.

The Republicans must view the Democrats' gift as something akin to receiving a brand new Thunderbird sports car. It's a great gift, but if left in the garage for the next year, it ain't doing too much for the new owners. Similarly, the Republicans have to take advantage of the error the Democrats have made in robbing Peter to pay Paul.

The Republican advantage is that they know a marginal tax-rate reduction is not a tax cut in a dynamic sense. However, by reducing tax rates, more people will work because of the incentive effects of lower tax rates. While it isn't a substantial cut, it is still something — and the dynamic effects of such a cut will undoubtedly contribute to an increase in economic growth.

In addition to their stimulus-killing gift, the Democrats have also filled Republican stockings by objecting to virtually every tax benefit given to corporations. What the Democrats really don't understand is that this recession is a business-led recession, not a consumer-led one. Corporations are being penalized during a down economic period, and there will be even more layoffs and much higher unemployment to come.

Meanwhile, consumers — as an economic class — are not suffering much in this recession. Compensation is still rising and low inflation is keeping prices under control. Increasing competition and lower energy prices are great for consumers but lousy for corporate profits. By continuing to stick it to those big, bad corporations, the Democrats are undermining the chances for a business-led recovery. The Republicans must make sure they take that political Thunderbird out of the garage every day through next November and demonstrate that the Democrats are the ones that are punishing the economy, not the Republicans.

Maybe the biggest economic and political present may come next Christmas when President Bush and a reconstituted Congress come together with a meaningful change in U.S. fiscal policy that benefits all Americans.