- The Washington Times - Sunday, February 6, 2005

President Bush was strong and steadfast as he delivered his State of the Union plans to fiscally restructure the economy and press ahead with his foreign-policy vision of democratization and freedom.

The president devoted considerable time last Wednesday night to his domestic conservative reform agenda. He restated the economic power of supply-side incentives to work, save, and invest, all of which combine to grow the economy. Mr. Bush proposes to make the 2003 tax cuts permanent, which means permanently lower tax rates on personal income, investor dividends and capital gains, as well as elimination of the estate tax.

Politicians pay careful attention to real-world results, not academic treatises. So it’s not surprising Mr. Bush remains committed to his successful supply-side experiment.

The domestic private sector — roughly 80 percent of the economy — expanded 5.4 percent for all 2004 after passage of the 2003 tax cuts. A cautious Federal Reserve has kept core inflation at a minimal 1 percent and unemployment is a low 5.4 percent. The supply-side plan is working.

In his address, the president notably mentioned the tax-reform panel headed by former Sen. Connie Mack. Space is always scarce in these documents. Featuring tax reform so prominently means this is a key presidential priority. Indeed, making existing tax relief permanent and then highlighting the need for a new code “that is pro-growth, easy to understand, and fair to all” makes for an even stronger second-term commitment to incentive economics.

Mr. Bush also repeated his plea for congressional action on new energy production, “including safe, clean nuclear energy.” He re-emphasized the need for legal reforms to stop “irresponsible class-action and frivolous asbestos claims,” as well as the necessity of “medical liability reform that will reduce health care costs.” These are also pro-growth policies.

Another welcome surprise came when Mr. Bush said his new “budget substantially reduces or eliminates more than 150 government programs that are not getting results, or duplicate current efforts, or do not fulfill essential priorities.” You can already hear the interest-group squeals from K Street lobbyists. Cheers, however, should ring from Wall Street. As financial markets know full well, lower federal spending releases resources to the private economy that will be used productively to start businesses and create jobs.

Less of a surprise was Mr. Bush’s heavy emphasis on Social Security reform, but this part of the speech also included a bonus announcement: Young workers will eventually be able to put roughly two-thirds (or 4 percentage points) of their payroll taxes into personal retirement accounts, if they so choose. At lower tax rates on saving and investment, young workers will have strong encouragement to redirect their taxes to the investment markets where the money will finance entrepreneurship and technological advances rather than support unproductive government spending.

Over time, this will make a huge contribution to economic growth. In effect, the Bush Social Security reforms will reduce government spending and increase personal saving.

According to Heritage Foundation economists, using assumptions from the latest Social Security actuarial report, Mr. Bush’s plan would increase personal saving by an unbelievable $61 trillion over the next 50 years, with a $3.6 trillion savings increase in the 50th year.

So, Mr. Bush’s fiscal restructuring will increase both public and private saving. No respectable economist in either political party should object to this. Honest Keynesians would have to admit that greater national saving would reduce our reliance on foreign capital inflows, thereby narrowing the trade deficit and strengthening the dollar.

As for turning the financially troubled retirement system from an unsustainable pay-as-you-go transfer plan to a true market-based pension plan, Mr. Bush explained, “Your money will grow, over time, at a greater rate than anything the current system can deliver.” In other words, the tried-and-true principle of compounded interest will replace the broken crutch of government entitlement.

On foreign policy, the president reaffirmed his Inaugural-speech vision that, “The only force powerful enough to stop the rise of tyranny and terror, and replace hatred with hope, is the force of human freedom.” Building on the spectacular success of the Iraqi elections, Mr. Bush called the pro-democracy forces in Iran to revolution and warned Syria to stop safe-harboring terrorists — including the Saddamite generals conducting the counterrevolution against Iraq. On this last point, U.S. Gen. George Casey, commander of multinational forces in Iraq, has in effect been given a free hand to do what is militarily necessary to stop the insurrectionary flow of money and murderers from Syria to Iraq.

On economic growth and national security, George W. Bush steadfastly maintains his vision of liberty and freedom. He may not get everything he asks for, but the Beltway media make a big mistake if they continue “misunderestimating” this extraordinary politician.

Lawrence Kudlow is co-host of CNBC’s nightly “Kudlow & Cramer” and is a nationally syndicated columnist.

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