Stagnant Politics, Stagnant Economy

Economic policy is paralyzed because both political parties are trapped in their respective conventional wisdoms. The Democrats, the party of income redistribution, are gearing up to run against "the excesses of the 1980s"-the only successful decade most Americans can remember. Their prescription for a lackluster economy is an extension of unemployment benefits and higher taxes on the rich.

The Republican Establishment is equally irrelevant. Mesmerized by the budget deficit, it abandoned Reagan's high ground on economic growth, focusing instead on deficit reduction, which it believes is the path to lower interest rates and economic prosperity. Last year's budget agreement, engineered by Budget Director Richard G. Darman, epitomizes this thinking. President Bush abandoned his plan to reduce the capital-gains tax rate and his pledge not to raise taxes, and he attacked the deficit with higher taxes. Predictably, the deficit reached record highs as the economy stumbled. Worried about the economy, the White House is again debating a "growth package."

Americans want opportunities to succeed. They can't get them from Democrats, who want to supply dependent voters with handouts and excuses for failure. Republicans talk a better game about individual responsibility but, sans Ronald Reagan and Jack Kemp, are not very aggressive about raising the ladder of economic opportunity. Entrepreneurial capitalism is as unwelcome among the Republican corpocracy as on the liberal plantation. With nowhere to look for leadership, the economy is languishing. Characteristically, Bush responded to Democrats' proposal to extend unemployment benefits by promising to do the same thing--but for a shorter period.

BAILOUT BILLS. Meanwhile, savings and loan associations, banks, and insurance companies continue to be pulled down by the sharp hike in the capital-gains tax that sent commercial real estate into a tailspin. Multibillion-dollar bailout bills are piling up on taxpayers, while Democrats whine that a lower capital-gains tax would benefit the rich, and Republicans complain that it would worsen the deficit.

The fatal problem of American politics is that both parties are status quo parties in thrall to organized interest groups whose continuing dominance depends upon keeping aspiring newcomers from succeeding in life. During a short period from the late 1970s to the mid-1980s, innovative politicians working with supply-side economists broke the U.S. economy out of its organized failure by expanding access to capital. The 1980s saw a revival of the animal spirits that created new wealth-along with 20 million jobs-while big-company payrolls shrank. As Professor Glenn Yago of the State University of New York at Stony Brook shows in his newly released Oxford University Press book, Junk Bonds, high-yield issuers "accounted for 82% of job growth of all publicly owned companies between 1980 and 1986"--Mike Milken's high-flying years.

Milken did the economy so much good he had to be locked away, along with Reagan's supply-side policies. Threatened political establishments have hammered a decade of expansion to a halt with regulation, new taxes, monetary policy, and prosecutions of "greedy hotshots"--Treasury Secretary Nicholas Brady's description of America's entrepreneurs. If truth be known, both parties are reveling in the excesses of the 1980s to justify regulation that protects the status quo by locking opportunity out of the economy.

RECAST THE DEBATE. The paradox in the current political setup is that the Democrats need a forceful advocate of opportunity like Jack Kemp more than the Republicans do. The Republicans don't want him, and the Democrats need him to make them nationally competitive again by replacing welfare with opportunity. Kemp is right that the capital-gains tax falls on opportunity--not on wealth-and thus denies capital to those who need it, not to those who have it.

If the U.S. economy is to prosper, one party or the other must rework the fairness debate and recast it in terms of empowering people with capital. Supply-sider Jude Wanniski stresses that giving income to the poor doesn't solve their problem. They need access to capital so that they can create wealth. The best way to help the long shots in the economy is to abolish the capital-gains tax.

We already know that the Democrats' economic model is bankrupt. Welfare states are collapsing everywhere--even in the state of Michigan, which has just eliminated its general-assistance welfare program for able-bodied adults. And now, Budget Director Darman is proving that the Republican Establishment is wrong to claim that a tax hike, not economic growth, is the key to deficit reduction, that high deficits mean high interest rates, and that low interest rates are the key to investment and prosperity.

The collapse of communism calls for the resurgence of entrepreneurial capitalism. The U.S. needs a political party that will fight the Establishment and special-interest groups to keep the economy open to opportunity. It is absurd for the self-anointed "fairness" party to fight for a high capital-gains tax rate. A tax on opportunity is the least fair tax of all.