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The Wall Street Journal,

December 10, 2002

Two New Salesmen

By Richard W. Rahn

Will the new Bush economic team succeed? The short answer is yes, and here's why. John Snow and Stephen Friedman have been brought on as Treasury  Secretary and head of the National Economic Council not so much to make  policy as to sell it. They have reputations as consensus builders, and for  being effective advocates for their policies. Critics of the appointments  note that neither Mr. Snow nor Mr. Friedman has substantial experience in  economic policy making. That is true, but the economic policy team is still  in place despite Larry Lindsey's resignation as head of the NEC. Glenn  Hubbard, the highly regarded chairman of the Council of Economic Advisors, will remain, with his influence increased.

Reluctant O'Neill

The new economic growth package, with investment-oriented tax relief, has  been signed off on by the president. This package was largely developed by Messrs. Lindsey and Hubbard, who won many of the internal administration disputes over its makeup. Most of the administration's economists favored a new round of tax cuts but Paul O'Neill was reluctant to push for them. The  economists thought new cuts were necessary to ensure the continuing rebound of the economy and to redress some of the long-standing tax impediments on investment which have been a depressant on long-term growth. As a condition  of being offered the jobs, both new men pledged to fully back the growth  package, and they are reported, even, to be enthusiastic about it. If this is  true, those who are worried that the newcomers -- especially Mr. Friedman -- would be more concerned about reducing deficits than increasing growth can drop their objections, but not their guards.

A particularly encouraging note is that Messrs. Snow and Friedman have articulated the need for dynamic scoring of proposed tax changes.  Traditionally, both tax-writing committees of Congress and the Treasury have used static analysis, which assumes little or no behavioral change, when estimating the gains and losses from any tax changes. Dynamic scoring involves estimating the effects on work, saving and investment from any tax  change which should result in far more accurate numbers. Properly structured  reductions in tax impediments on investment will cause the economy to grow  faster and result in higher tax revenues over the long run. We have seen this  effect with reductions in capital-gains tax rates and other investment-oriented cuts. Understanding the importance of dynamic scoring is essential to both designing and selling a proper tax program.

Concern has been expressed, because of Mr. Friedman's association with the Concord Coalition (a deficit reduction group, some of whose members never  have been able to grasp the difference between tax rates and tax revenues),  that he might be a non-supply side "root-canal" Republican, in contrast to a pro-growth (Kemp-like) one. But I am told that during the vetting process, the White House became convinced that Mr. Friedman understood growth to be  the key to reducing deficits, and that the right tax cuts increase growth.

Paul O'Neill suffered not only because of his lack of political skills and sensitivities, but from his failure to recognize and squash bad ideas emanating from Treasury bureaucrats. An example is the interest-reporting  regulation proposed by the IRS. This would require U.S. banks to report to  some foreign governments interest paid to their citizens, even though the  U.S. deliberately does not tax such interest payments. This provision would  impose a substantial cost on U.S. financial institutions and drive capital  investment out of the U.S. in order to help foreign governments collect taxes on their citizens. Every industry, economic and tax policy, and civil liberties group that has commented or testified on the regulation has been  opposed to it, as has every testifying member of Congress. Even the Small Business Administration and bank regulators' associations oppose it. The  ultimate irony of this proposal is that it would reduce tax revenue to the U.S. because of the reduction in foreign investment. The fact that such a  proposal, made during the last week of the Clinton administration, could continue to be considered almost two years into Mr. O'Neill's reign is  another demonstration of why his departure was necessary.

Administration officials are saying that Mr. Friedman and Mr. Snow have the  ability to reach out to Democrats. This causes concern among many Republicans, not because they do not believe in working with the opposition,  but because others, famous for getting along with their political opponents,  do so by giving up their policies and principles. Ronald Reagan should be the  role model for the new team. He knew what he believed and where he was  headed, but he also compromised when necessary without giving up core principles. Mr. Reagan also understood that, before proposing a solution to a  problem, it had to be explained to the public and opinion leaders in clear  language. Once people understood the ailment and agreed with his diagnosis,  the medicine became much easier to sell.

A problem this administration has had is not explaining often enough the particular economic problem it is trying to resolve. For instance, the  Democrats always argue that whatever Bush tax package is presented benefits  only the rich. Thus the new team has to explain, many times over, how the rich pay almost all the taxes (the top 50% of taxpayers pay 96% of the income  tax). And in order to increase growth and jobs we must have more investment, and this investment will create more and higher paying jobs. Many have  forgotten this basic message from the Reagan years, and the administration has not made the effort to explain these economic fundamentals. Messrs. Snow and Friedman have reputations for being persuasive; however, now they have the greatest challenges of their professional lives, because they need to  persuade the skeptical, often hostile, American media.

Sound Policies

The new economic team would be well advised to quickly meet with Jack Kemp and many of those around him from the Reagan years who have skill in developing high-growth economic policies, as well as a proven ability to  explain the need for such policies to the American people. John Snow and Stephen Friedman are men of accomplishment. My bet is that they will learn from the mistakes of their predecessors, and have the skill to implement the  sound policies developed by these same predecessors.

Mr. Rahn is senior fellow of the Discovery Institute and adjunct scholar of  the Cato Institute.


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