From the Jaws of Defeat
President Bush continued his bold pre-November offensive last week, focusing our attention on the war, national security, the totalitarian regimes in the Middle East, and even taxes.
Talking about the potential for a Democratic shift in Congress, the president warned a Florida audience, "If they get control of the House of Representatives, they'll raise your taxes. It'll hurt our economy. And that's why we're not going to let them get control."
The president also warned that Democrats would raise taxes in a futile attempt to balance the budget: "They will raise your taxes and figure out new ways to spend your money." He then added the real money line, good supply-sider that he is, "The best way to balance the budget is to keep pro-growth policies in place."
Mr. Bush is doing a great job this political season. His polls are rising everywhere, as are the numbers for congressional Republicans. The House GOP 2006 contract on TradeSports.com is up to nearly 57% from 38% two weeks ago. That's an amazing turnaround, and huge credit goes to Mr. Bush.
On all topics it seems the Bush message is resonating. In particular, it's nice to see him claiming ground on the economic front. This is territory he fought for, and he shouldn't give it up.
This week on CNBC, I asked prospective Democratic Ways and Means chairman Charlie Rangel if he would roll back the Bush tax cuts on capital gains and dividends. Mr. Rangel deflected the question, speaking instead about raising the cap on the alternative minimum tax. Earlier, in a Bloomberg News interview, Mr. Rangel said he "cannot think of one" of Bush's tax cuts that merit renewal — another crafty answer, since the investor tax cuts aren't up for renewal until 2010. Mr. Rangel, who emphasizes the need for bipartisan tax, budget, and entitlement cooperation, knows the president will veto any tax-hike proposal while he is still in office.(By the way, bravo for Mr. Rangel's trashing of Hugo Chavez and his patriotic defense of Mr. Bush.)
Indeed, the chance of any tax-cut rollback is pretty thin. But Mr. Bush is being politically savvy when he warns Americans about the Democrats' fiscal wish list. On the economy, Mr. Bush knows he has argument, data, and momentum on his side.
Oil and gasoline prices have plunged over the past month, taking away a big Democratic issue. The broad stock averages have had a nice run since Labor Day and are closing in on five-year highs. This rally is a measure of the future economy and business profits, and it signals continued growth as far as the eye can see. And while investors are abandoning the energy sector, consumers are spending — making the retail stock index one of the hottest plays on Wall Street.
At the same time, inflation indicators such as gold, commodities, and energy have been pummeled. Long-term interest rates have dropped quickly, to 4.6% from 5.25%, another sign of diminishing inflation fears. Consequently, the Federal Reserve Board hasn't touched interest rates at its last two meetings, while many on Wall Street are now betting the next Fed move will be a rate cut, not a hike.
Meanwhile, the monetary base, which measures the Fed's dollar-creating activities, has been flatlined, with literally zero growth over the past eight months. As Milton Friedman taught us, excess money is the cause of rising inflation. But the Fed is taking care of that problem, which is why forward-looking market indicators (i.e., gold, energy, and long-term bond rates) have all dropped significantly. In fact, if you combine the rising stock market with the falling inflation markets, the clear forecast is for noninflationary growth.
This is just what the doctor ordered — and another chapter in the greatest story never told.
No, you won't hear Democrats admit that government policies under Mr. Bush are working. In fact, the Democrats have stopped even talking about the economy. But most Americans seem to be coming around.
A recent Los Angeles Times/Bloomberg poll reveals that 54% of Americans believe the economy is doing well. Almost one-in-three respondents say lower gasoline prices have enabled them to spend more on household items. And while half of those polled say they disapprove of Mr. Bush's management of the economy, that number is down from 59% at the beginning of August.
The Democrats, without an economic message of their own, are losing their audience. Even their anti-Wal-Mart tirades are falling short, with a majority of Americans saying the retail giant is good for the economy.
Mr. Bush is involved in quite a political turnaround. His national-security offensive, buttressed by his strong stance on tax cuts, is working. If he keeps it up — and there's every reason to think he will — the GOP Congress may be poised to snatch victory from the jaws of defeat.
Mr. Kudlow is host of CNBC's "Kudlow & Company."
