- The Washington Times - Tuesday, September 26, 2000

Stock markets swooned at the opening Thursday as the Dow Jones industrial average lost a couple of hundred points and the Standard and Poor index fell 2 percent. Not even the resignation of Microsoft basher Joel Klein from the Justice Department prevented an early Nasdaq sell-off.

Financial commentators blamed the weak market on the four "E's" euro, energy, earnings and economy. No question that these are playing roles, but there's much more to it than that.

This is an election year. Campaign 2000. And the newspapers are full of stories about Al Gore attacking big corporations while on the campaign trail. President is not enough. He also wants to be regulator-in-chief.

As he did during the Democratic National Convention in Los Angeles, Mr. Gore is again bashing health insurers, drug companies, oil, tobacco and so-called industrial polluters. That is, when he takes time out from his Hollywood fund-raising.

The Washington Post reported Mr. Gore as saying, "The absurdly high prices for prescription drugs, the rising price of gasoline, the demands by HMOs to overrule the medical decisions that are made by doctors these are unfair efforts by powerful interests to take advantage of the American people."

This critique is absurdly incorrect. Energy markets determine prices, not oil companies. And the Clinton-Gore administration should have trust-busted the Organization of Petroleum Exporting Countries (OPEC), not Microsoft. Meanwhile, the private sector of the health care industry is dominated by cumbersome and costly federal regulations.

But there's an even bigger point in this. Investors are starting to see that while Mr. Gore says he wants jobs, he is hostile to the businesses that create jobs. Millions of people work in those industries, and tens of millions invest in them. Their future prosperity is being threatened by Mr. Gore's left-liberal populist rhetoric.

Mr. Gore says he wants prosperity, but he doesn't want anyone to get rich. His attacks on certain big businesses are fast becoming an attack on all business. This is spooking the stock market.

Mr. Gore threatens to launch heavyhanded government regulation that would raise business operating costs, lower profits, reduce investment returns and dry up capital funding necessary for innovation and expansion.

This is what happened during the 1970s, when inflation-adjusted stock prices steadily slipped and economic growth slumped amid wage, price and energy controls. Mr. Gore's demagogic rhetoric is reminiscent of former President Carter's failures during that dreadful era.

So, election uncertainty has now become a major market risk. Since Mr. Gore's surge in the polls, the summer rally has ended. The Dow and the S&P; have lost 6 percent, the Nasdaq 10 percent. It's not a good story.

As for the four "E's," none of them are long-term prosperity-breakers. Alan Greenspan's Federal Reserve will not inject excess liquidity that would turn the temporary oil price bubble into a recurring rise in the general inflation rate. That is why gold remains low and the dollar high.

Fed policy is restrained, not accommodative. So the oil shock takes on the hue of a temporary tax increase that will slow growth by something like 0.3 percent to 0.5 percent from what otherwise would be the case.

Monetizing energy price increases led to the hyperinflation of the 1970s. Mr. Greenspan knows this. He proved his mettle during the Persian Gulf war when he refused to ease, even though the United States had slipped into recession. (Tax cuts then would have helped.)

I now believe that in the October FOMC meeting, the Fed should not shift its policy directive bias from inflation restraint to neutral. As oil works its way back toward $25 per barrel in the fourth quarter, there will be time enough to shift the bias. When the oil squall blows over, interest rates will come down next year.

Because higher oil and gasoline prices are pinching consumer and business purchasing power, the economy is likely to slow toward a 3 percent growth rate. Last year's "Y2K" spending surge borrowed from this year's activity. Fed liquidity deflation is another growth-restraining influence. As well, soaring personal tax payments have reduced spending power.

But there is no evidence the technology sector is faltering. The old economy is barely growing right now, but the new economy is producing at a 50 percent rate. That means the productivity miracle is very much alive and well.

So profitability may slow a bit, but aggregate net income from business will continue to rise at a decent pace. Actually, rising natural gas prices are improving capital returns that will stimulate future production to fuel new electricity generation in order to sustain the wired economy.

As for the euro, supply-side tax cuts in Germany and elsewhere in Europe will begin early in the new year. Higher after-tax investment returns will bolster the sinking currency's value. American investors should not panic by selling multinational technology and consumer companies that operate in Europe.

Actually, European competitiveness will rise as a result of pro-growth deregulatory and tax-cut policies now in tow. Don't forget, too, that for all the pessimism over Japan, the fact is that country has embarked on considerable deregulation and supply-side tax-rate reduction.

However, if the United States injects an anti-growth dose of over-regulatory zeal into its economy, then it will erode its competitive edge relative to its neighbors and trading partners. So Al Gore's campaign to become U.S. regulator-in-chief poses a threat to our economic future.

In an important new article titled "A Supply-Side Perspective on Trade," economist Arthur Laffer reminds us that pro-growth policies improve a nation's terms of trade as symbolized by an appreciating real exchange rate. But anti-growth policies, including heavy regulation, rising tax rates, inflationary money or protectionist trade barriers lead to a deterioration in national competitiveness and diminished wealth creation.

Mr. Laffer's analysis is must-reading for investors. I suppose it's too much to hope that his paper will find its way to Mr. Gore's desk.

There's no reason why Democrats can't be pro-growth. John F. Kennedy was. Working with a Republican Congress, Bill Clinton was. But Al Gore is going down the wrong road. His crusade against business would mark a left turn in economic policy.

Fortunately, today's polls show that free-enterpriser George W. Bush is starting to move up again. He's inside the margin of error in tracking polls from USA Today, Battleground 2000 and Rasmussen.

So there's no Gore landslide out there. It will be a horse race. For investors, the stakes are very high.

Lawrence Kudlow is chief U.S. investment strategist and chief U.S. economist at ING Barings LLC.

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