- The Washington Times - Wednesday, June 26, 2002

The sagging stock market is diverging significantly from the rising economy. It's a puzzling and very unusual event. Much of this disconnect can be traced to a loss of investor trust stemming from corporate corruption and the breakdown of accounting standards. Worries about domestic terrorist bombings are also weighing down Wall Street.

But there's more to it than that. Anti-growth policy mistakes by the Bush administration could be curbing investor appetites for longer-run stock market commitments.

Recently, the administration's economic message has dramatically shifted away from the Reaganesque, free-market, free-trade, supply-side policy direction that President Bush touted during the 2000 campaign and last year, when his broad-based tax-cut package was enacted into law and hemispheric and global free trade were passionately supported. Instead of continuing with this winning formula, Mr. Bush has gone protectionist and regulatory. This shift is handcuffing investors.

In the name of political expediency, Mr. Bush is starting to sound more like Richard Nixon than Ronald Reagan. To win the 1972 election, Nixon gunned the money supply, imposed wage, price and energy controls, and set down a number of trade and import restraints. All this created inflationary recession or stagflation which blew up the economy and the Republican Party and culminated in the election of a left-wing Democratic Congress in 1974. So much for short-run political expediency. It didn't work for Nixon. It won't work for Mr. Bush.

Consider this: The end of the post-September 11 stock market rally can be traced to this March. Since then, stock averages have slumped badly. It is no coincidence that a 30 percent steel tariff administered by the White House occurred that very same month, right at the market peak, marking the end of the stock market's war recovery.

Of course, the administration assured us that the tariff measure would have no palpable economic effect. But the exact reverse has occurred. Steel-price increases have ranged between 20 percent and 70 percent, covering a wide variety of steel-using industries, including old-economy manufacturers that would be responsible for a good amount of investment in the recovery. Sure, new Bush laws to lower tax rates on businesses are in effect. But the increase in the cost to make steel may be offsetting the positive results of any business tax cuts.

More, a new tax war between the United States and Europe may be coming on the heels of a threatened trade war over the steel issue. The Treasury Department and Republican Ways and Means Chairman Bill Thomas, California Republican, are pushing to raise taxes on foreign-owned companies operating in the United States. This, of course, would repel foreign companies from operating here, and that's a significant negative for the growth of our economy.

Tax-policy officials are also moving to prevent American companies from reincorporating in low-tax havens such as Bermuda or Barbados. No one likes to see American businesses relocate. But several companies are trying to reduce their overall tax costs in order to pass on higher after-tax profits to shareholders. That's not a lack of patriotism. It's a complaint against burdensome U.S. business taxes. And there's a lot to complain about.

Of the 30 industrial-country members of the Organization for Economic Cooperation and Development (OECD), the U.S. ranks 24th from the top, with one of the world's heaviest corporate tax burdens. Even more, as conservatives sweep to victory in European elections, every center-right leader is talking about across-the-board tax cuts. If these cuts are implemented, the United States will fall even further behind in the highly competitive global race for capital.

Misguided U.S. policies on taxes and trade, which have also produced a slumping dollar, are two reasons why foreign investment flows into the United States have nearly come to a halt. But there are even more anti-growth policies coming from Washington.

Consumers overwhelmingly support Microsoft in its long-running anti-trust case. But the government via the Justice Department may desert the leading U.S. software maker and approve stifling sanctions desired by a handful of aggressive states. Justice is also launching a criminal inquiry into semi-conductor makers for alleged collusion to prop up prices, even though the temporary rise in chip prices earlier this year has already been erased. Chip prices have dropped roughly 25 percent yearly for a half-dozen years. And Justice is taking on this deflating yet vital sector?

That's economic illiteracy.

With so many anti-growth trade, tax and regulatory threats in the air, stock markets are stuck in a funk. The president appears to have lost his economic compass, and would do well to return to the sound Reagan plan for domestic growth. Stock averages hated Richard Nixon but adored Ronald Reagan. Surely there's a lesson in this.


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