Kemp: Market's problem isn't "infectious greed," it's high taxes and overregulation

townhall.com ^ | July 23, 02 | jack kemp

[churchillbuff]

JACK KEMP COLUMN

July 23, 2002

'Infectious greed' and other miasmatic diseases

American equity markets have lost $7 trillion in value, approximately 40 percent, since they peaked in late March 2000. The Washington establishment has decided to blame it on a "speculative bubble" caused by foolish investors and to a "loss of confidence" caused by greedy corporate "wrongdoers" who were out to systematically plunder their companies.

In a July 8 press conference, the president said corporate corruption might cause Americans to "lose confidence in the free enterprise system." The next day, in a speech to Wall Street, he said, "At this moment, America's greatest economic need is higher ethical standards" -- which is always true.

The president's straight talk was unfortunately misinterpreted by the rest of the establishment as a signal to make the "evil" businessman and woman the fall guy. Congress thinks the people have lost confidence in the economy because government isn't tough enough on business, and it is in a legislative frenzy to mete out punishment. Fed Chairman Alan Greenspan has joined the witch hunt against American business by preaching about the wages of greed and avarice.

Greenspan offers a misguided "bubble" diagnosis along these lines: "Irrational exuberance" among investors "engendered an outsized increase in opportunities for avarice" and created an epidemic of "infectious greed" that overwhelmed the "guardians" of the economy. Firms vastly overproduced goods and services, especially in the technology industry, which led to "excess supply" and "excess capacity." Too many people became employed, and the economy was running away at an unsustainable pace with too many people getting wealthy.

This hyper economic activity was stoked, supposedly, by people's insatiable greed, their lack of scruples and an incurable myopia. Business executives were cutting corners and cooking the books to loot their businesses and fleece their stockholders, who had thrown due diligence to the wind. The economy inflated because people invested too much money in too many get-rich-quick schemes and then ran amok because government didn't regulate and tax it enough.

This is the same kind of quackery doctors practiced during the Civil War when they had no comprehension of germs or antiseptic technique. Disease and infection were blamed on toxic "miasma" or "effluvia" -- as meaningless in explaining what causes disease and infection as "financial bubbles" and "infectious greed" are in explaining what causes economies and stock markets to rise and fall. Civil War surgeons killed their patients using unsterilized instruments; today's policymakers poison the economy with high tax rates and crushing regulations.

The economy boomed in the 1990s because the Fed maintained fairly stable monetary policy early in the decade, there were technological advancements and resulting productivity gains of historic proportions mid-decade, and in 1997-98 Congress cut the capital gains tax and made other improvements in how the returns to capital are taxed. The economy went into a ditch when the Fed pinched off the flow of liquidity and appreciated the value of the dollar by some 40 percent, Washington became obsessed with budget surpluses and refused to cut tax rates, and government went on a regulatory jihad.

The '90s boom economy wasn't a bubble that popped in an act of divine retribution for hubris, greed and immorality. Business plans and economic projections that made sense under a reasonable policy regime suddenly became unrealistic and unworkable when government jerked the rug out from under them with ridiculous anti-trust actions, anti-competitive price controls and deflationary monetary policy that sucked the oxygen out of the economy. "Excess supply" and "over capacity" came about only after bad government policy crunched the economy.

George Gilder said it best in a recent Wall Street Journal opinion column: "Accounting tricks at WorldCom, Global Crossing or Qwest did not cause these companies to fail. Accounting tricks were a symptom of failure -- the result of a perfect storm of government policy mistakes that led to the deterioration of an industry at an unprecedented pace. No number of accounting reforms, cathartic judicial proceedings or ethical reawakenings will bring back technology and economic growth."

On the day of the president's press conference, the Dow Jones industrial average opened at 9,375. By last Friday, the Dow had fallen by more than 1,400 points, almost 15 percent. Clearly the real "loss of confidence" affecting the economy is the loss of confidence in government.

Rather than collapsing, markets would be soaring if the establishment were considering serious economic reforms, such as reforming the tax code, slashing corporate income tax rates and capital gains tax rates, and allowing companies to deduct dividends paid to stockholders. We could also get serious about deregulating the remaining two huge overregulated bottlenecks in the American economy -- telecommunications and electric utilities.

Until Washington gets serous about such economic reforms, this economy will remain in serious trouble.

[jiggyboy]

Jack, you're insane. Invert every sentence and post it again.

[Alberta's Child]

Jack Kemp is smoking something if he thinks the stock market collapse is the result of taxation and over-regulation. People paid idiotic prices for shares in companies that had never mde any money and were no indication that they ever would.

If anything, the capital gains tax cuts were actually bad for the stock market in one respect. Because of the enormous spread between the top income tax rates (38%+) and the top capital gains tax rates (20%), people had a financial incentive to ignore income-producing assets in favor of assets that may not produce income but had the potential for growth. Examples of the latter include not only growth stocks but real estate as well -- which is why, incidentally, the run-up in the stock market (espeically in growth stocks) was accompanied a boom in real estate.

[conservatism_IS_compassion]

Rather than collapsing, markets would be soaring if the establishment were considering serious economic reforms, such as reforming the tax code, slashing corporate income tax rates and capital gains tax rates, and allowing companies to deduct dividends paid to stockholders. We could also get serious about deregulating the remaining two huge overregulated bottlenecks in the American economy -- telecommunications and electric utilities.

The market has been going downhill ever since the inJustice Dept announced its jihad against Microsoft.

Say what you will, but with Kemp or Forbes at Treasury there would be a pro-growth, pro-freedom economic agenda afoot. The cheapest, fastest fix would be to set the capital gains tax rate to 10%. There is never any reason to have it even that high, but it's absurd to have it higher because it yields less rather than more revenue that way.

[Lee_Atwater]

I found it funny that the financial media attributed the 500 point (I think 6%) uptick in the DOW was due to the Rigas arrests. It was more than likely due to a technical rally and the news that the "Corporate Responsibilty" may not to be a huge regulation bill in the end.

The Kemp article says what I have been thinking--that the bankruptcies were not because of fraud. The fraud was meant to distort the market to fend of bankruptcy.

I saw some of "Donahue" last night. I watched mostly out of morbid curiosity. He was in Houston with a bunch of former Enron employees (some Worldcommers there too) in the audience. He had Nader, Ivins, and some journalist on stage with him. It reminded me of a "Socialist Workers Party" rally. Anyway, these Enron employees, I think, have benefited from the fraud because they were allowed to keep their jobs longer. But they were portrayed as "victims of greed". They were victims of market forces (ex. deflation) and bad management decisions (ex. Enron's broadband business).

[Alberta's Child]

. . . today's policymakers poison the economy with high tax rates and crushing regulations.

I must really be missing something here -- tax rates were no different when the stock market slide began in 2000 than they were in 1995 or 1999.

Are you sure you didn't find an article that Kemp had written back in 1979 and post it here today by mistake?

[Lee_Atwater]

Think about this for a second. There were large surplus dollars going into the Treasury in 2000 -- this money was not doing anything productive. That has to have some impact on growth.

[conservatism_IS_compassion]

the capital gains tax cuts were actually bad for the stock market

. . . it's good for the economy to give a tax break for selling a stock that's a loser, and to penalize the taxpayer for selling a stock that's a winner?

A capital-gains tax is a tax on anticipated future dividends. You only pay it if you sell the stock.

[Catie]

Mr. Kemp ignores the fact that many, many companies played fast and loose with lax accounting standards to hype their profits and consequent value on "the Street."

[habs4ever]

This is a very good piece and worth wider distribution.Freepers could learn a lot by absorbing what Kemp is saying.

[meenie]

Kemp should know that the present market is not being held back due to capital gains. Everything and everybody is being harmed by our excessive regulation. It does chap me that Uncle has his hands out when you do have a profit from capital gain but ignores you when you have a loss. Sort of fickle, I would say.

[axxmann]

The parasitic effects of the Big Government Nanny State are finally overwhelming our ability to prosper. Time to remove the tumor.

[Allrightnow]

That's it! I am going to retain Ms. Cleo's services as my financial advisor and build a bomb shelter. After reading the above article I have arrived at the conclusion that there is no sure way of figuring out what's going on now or where this is all leading. I'm told the cause could be regulation, taxes, bubbles, hedge funds, corporate crime, periodic market fluctuation, fed mismanagement, fed intervention, the Clinton administration, a DNC conspiracy, the media, irrational exuberance, over correction, under correction, or the fact that I am wearing the wrong tie. I have read posts and articles that suggest all these except the tie theory (that's my own).

Throwing my two cents in here: Next time Greenspan wants to say something positive about the economy, let him raise rates 1/2 point first. It will do more for confidence levels then he could ever imagine.

[Alberta's Child]

It does chap me that Uncle has his hands out when you do have a profit from capital gain but ignores you when you have a loss.

Uncle Sam doesn't ignore you when you have a loss -- you can deduct those losses on your income tax return.

[churchillbuff]

Say what you will, but with Kemp or Forbes at Treasury there would be a pro-growth, pro-freedom economic agenda afoot""""

REALLY GOOD POINT. WHEN W WAS ELECTED, I HOPED HE'D NAME FORBES AS TREASURY SECRETARY. INSTEAD WE GOT PAUL O'NOTHING

[churchillbuff]

Say what you will, but with Kemp or Forbes at Treasury there would be a pro-growth, pro-freedom economic agenda afoot""""

REALLY GOOD POINT. WHEN W WAS ELECTED, I HOPED HE'D NAME FORBES AS TREASURY SECRETARY. INSTEAD WE GOT PAUL O'NOTHING

[what's up]

They were high back then. Thing is, when you continue high taxes on the supply side of the economy, eventually it's going to take a toll.

Kemp is right on!!

[Alberta's Child]

That really doesn't make any sense at all. If the economy was strong in the late 1990s with these tax rates in place, and the economy is in trouble now with these same tax rates in place, then it appears that the tax rates have nothing to do with the performance of the U.S. economy.

[Twodees]

The Kemp article says what I have been thinking--that the bankruptcies were not because of fraud. The fraud was meant to distort the market to fend of bankruptcy.

Give that man a cigar. We have a winner. There's greed allright and it's infectious, but the greed is that of politicans for more tax renenues and more control and they infect the victim classes they create to provide clients for their redistribution programs. The most virulent greed there is exists now among a leisure class who clamor for more entitlements and larger payments for their slothful lifestyles.