never become part of the regular
consumer-spending flow. Average people are smarter than politicians think --
they know that rebates run out. Only a permanent income increase -- like a
salary raise or a permanent reduction in one's marginal tax rate -- will
permanently change consumer-spending behavior.
The true cause of this recession was the stock market collapse,
not a consumer collapse. Companies used their share prices to back their
heavy debt. However, when the stock market crashed, and their loan
collateral was eviscerated, they were in big trouble. No more loans were
possible, and the debt became more burdensome as business prices fell. In
deflation-adjusted terms, debt burdens became more onerous, debt payments
became punishingly higher and collapsed stock prices gave firms nothing to
fall back on.
Eventually, cash-strapped businesses had to roll back operations
and lay off workers. Their wealth dropped out of site, and their liquidity
dried up. Sinking business prices for commodities, goods and equipment wiped
out profits, too. And all this was triggered by the three-year stock market
So let's be perfectly clear: Not until this stock market virus
is cured will business and the economy ever truly recover.
This is why President Bush's tax-cut plan is so important. By
abolishing the double tax on dividends, it aims directly at the stock
market -- the real source of the current economic funk. Additionally,
across-the-board tax-rate relief for individuals and families will shore up
shopping, small business growth and stock market investing. Bush has
outlined a two-pronged growth solution. His target, correctly, is the 40
percent drop-off in stocks and the related 11 percent fall in business
capital-goods spending -- not a slide in consumer spending (which doesn't
exist in the first place).
Of course, the Democrats have unleashed myriad class-warfare
attacks, saying the Bush proposal will only help the rich. But it turns out
that almost three-quarters of dividend recipients, or 70 million Americans,
earn less than $100,000 a year. They also receive 54 percent of total stock
dividends, meaning the Bush plan even gives shoppers a nice after-tax
But the true worth of Bush's tax-free dividend proposal is that
it will lift stock market values and wealth. Stock prices will rise,
investor returns will increase, old capital will be unlocked and new
liquidity will be reinvested. Businesses, meanwhile, will become more
creditworthy, with a stronger stock market to serve as collateral. This
business wealth effect, along with the likelihood of dividend reinvestment
by shareholders, will enable companies to expand their operations, update
their computer and equipment needs, and start rehiring workers.
Already, the mere mention of tax-free dividends by President
Bush has driven up stock market prices by 5 percent in the new year,
brightening the outlook for a business recovery. Yes, the Bush plan will
benefit consumers, too. But the real story is that Bush has the right
cure -- investor-targeted tax relief -- for the real economic ailment: a
disastrous three-year stock market decline that dragged American business
and jobs down with it.
Democrats refuse to understand that in today's investor-class
economy, it's the stock market that drives business production and
investment, and it's business that triggers jobs, salaries and consumer
spending. The longer Democrats remain in the dark on this point, the longer
they'll try to sell America on do-nothing, one-time tax rebates.
Thankfully, the investor-class voter majority is no longer
buying what the Democrats are selling.
After all the gnashing of teeth, it turns out that consumers
turned in a positive performance during the holiday season. Retail sales
increased more than 1 percent in December, yielding a near 5 percent pace
over the past year.
Consumer spending has been the backbone of our economy for the
last two years. In that time, it has grown at about a 3 percent rate,
despite the stock market collapse and the deep business-and-profits
recession. This is a solid consumer performance -- yet once again Democrats
mistakenly insist on giving consumers a quick one-shot of adrenaline via
temporary tax rebates. Wrong ailment, wrong cure.
If the Democrats would merely open their eyes, they would
understand that rebates don't stimulate the economy and that consumer
spending is not a problem today.
Take a look at the last tax-rebate experiment in 2001. Several
studies have shown that it yielded only 17 percent in consumer spending. The
remainder was saved, used to pay down debt or put in the rent envelope.
There's nothing morally wrong with any of this, but the rebates didn't spark
Milton Friedman taught us long ago that temporary increases in