THE ECONOMY stinks and it's not getting any better. President Bush, I'm sorry to say, is to blame.
Two years ago, it was possible for those of us who had supported him in 1988 to blame the Democratic Congress for inviting stagnation by opposing the president's tax proposals. TC year ago, as the recession became reality, blame still could be divided between the White House and Congress as they cut a deal to raise taxes. Today, the whole mess can only be laid squarely in the Oval Office.
The recession need not have happened. When he ran for president, Bush made only two promises on economic policy: He would not raise taxes ("read my lips"), and he would cut the capital gains tax to 15 percent from 28 percent to keep the Reagan expansion going.
In 1989, Bush clung to his promise not to raise taxes. But that October, confronted with fighting for his tax cut or settling for a deal on the budget, he took the budget deal. In 1990, the Democrats asked him: Would you like an agreement to balance the budget through spending cuts and tax increases? Or would you rather negotiate a cut in the capital gains tax? Again advisers, led by Treasury Secretary Nicholas Brady, persuaded him that the budget agreement -- raising taxes in a recession -- was preferable to his campaign promises. Now, for the third year, his economic team has persuaded him that prosperity is just around the corner and he does not need to negotiate a growth package with the Democrats. They prefer the Hoover-like security blanket of the budget agreement.
Unless a serious growth-oriented Republican challenges Bush, supply-side Reaganauts have no choice but to look for a Democrat in the tradition of John F. Kennedy, the last Democratic leader who put grassroots growth ahead of Fat Cat America's budget-balancing mania.
The capital gains tax remains the center of supply-side concerns about the economy. Unless it is eliminated or slashed, the forces of risk-taking and enterprise that drive the economy will remain smothered. Most Democrats are advised by demand-side economists, who focus on consumers. Risk-taking plays no role in their models. Dismissing supply-side concerns, they argue that a capital gains tax cut merely benefits the wealthy.
Think of a horse race. The favorite goes off at even money, and others at longer odds. The 40-to-1 long shot wins, but those who bet on it find at the window an internal revenue agent who takes all but $4, an even-money payoff. As word gets around, players no longer bet the long shots. Owners of long shots no longer enter them at the track. Only the favorite will enter, and it need only walk the track to win.
The economy is sick for this reason. Because of inflation, the capital gains tax is the highest in the nation's history, and for the fifth year in a row new business start-ups have declined. It isn't necessary to stimulate savings and investment: Plenty of productive capacity is sitting idle, like so many horses waiting to enter the race if only the government removes its threat to steal the purse.
The Democrats are wrong that the tax benefits the rich the most. Who are our society's long shots? They are poor, young minority members who have no access to capital. The favorites in the race are the rich, who have capital and benefit the least by a tax cut. Eliminating the tax would flood poor areas with capital. Because New York City is the center of financial capital, it would benefit the most.
There is no other solution to this Bush recession. Not investment tax credits, research and development subsidies, IRA's or other schemes that do nothing to correct the odds at the economic race track. Until this tax on risk-taking, innovation and opportunity is charply cut or eliminated, the economic decline will continue, making solutions to many other problems impossible as well.
Jude Wanniski is president of Polyconomics Inc., economic consultants.