Change We Can Believe In Is All Around Us

By BRIAN WESBURY

Rarely do senators become president, but in less than five months either John McCain or Barack Obama will become the 44th president of the United States. That's change, and that's interesting.

It's also what everyone seems to want – change. Sen. Obama promises to provide "Change We Can Believe In." Sen. McCain suggests that "the choice is between the right change and the wrong change." If it's the war that is the focus of all this talk about change, well, that's understandable, and maybe people really do want change. But if it's the economy, it's hard to imagine that change could happen any faster.

AP

Sens. John McCain and Barack Obama in January 2007.

In fact, the U.S. economy (really, the global economy) is transforming at an absolutely astounding rate. We're living in Internet Time, where policies and their consequences travel the world at the speed of light. The normal human reaction to such a rapid pace of change is to be overwhelmed, stressed out, anxious and fearful. As a result, it is probably true that when voters listen to talk about change, what they really hear are promises of "no change," which would be a huge difference from the status quo. They just want things "the way they were."

Look at the chart nearby. America's manufacturing output, as measured by the Federal Reserve, is up seven-fold since 1950, but manufacturing jobs as a share of all jobs have fallen to 10% from 30%. Your grandfather and father may have worked for General Motors (and joined the UAW), but it's likely that you don't and won't.

The problem, if it really is one, is not foreign competition or evil financiers. It is technology and productivity. In the 10 years ending in 2007, durable goods manufacturing productivity averaged an annual growth rate of 4.8%. In other words, if real growth is less than 4.8%, the sector needs fewer workers year after year.

For the economy as a whole, overall U.S. business productivity rose 2.7% at an average annual rate during the decade ending in 2007, 1.7% in the decade ending in 1997 and 1.4% in the 10 years through 1987. Change is everywhere, and it's accelerating.

This has happened before – in the Industrial Revolution – where the political environment bred America's first real populists, people like William Jennings Bryan and Theodore Roosevelt. Bryan was perhaps the best orator of American political history, and like Mr. Obama, he could affect people emotionally. Roosevelt, like Mr. McCain today, was a true American hero and one tough guy. History may not be exactly repetitive, but it sure seems to move to similar rhythms.

Unfortunately for the American economy, the populist movement of the late 19th and early 20th centuries led to a rapid growth in government intrusion into business activity. The populists didn't like the gold standard and demanded more government regulation.

In 1913, the Federal Reserve System was created and the income tax was introduced to pay for a growing government. And then, during the Great Depression – which was caused by the new Fed, trade protectionism and tax rate increases – a massive expansion in government took place. Forty years later, in the malaise of the late 1970s and early 1980s, the U.S. finally figured out what it was doing wrong. By returning to hard money under Paul Volcker, and lower taxes and less regulation under Ronald Reagan, the high-tech leg of the Industrial Revolution began.

The fruits of this are plain to see. Rather than watching the sun set on the U.S., as many believed would happen in the early 1980s, the U.S. has experienced one of the greatest booms in wealth creation in world history. And the impact of our technological innovation has helped lift untold numbers out of poverty.

This technology has created massive amounts of change. Like the Industrial Revolution before it, the current transformation is anything but pain-free. It's what Joseph Schumpeter called creative destruction. Google, Craigslist and Microsoft have been prospering. General Motors, United Airlines and the New York Times have not. In the midst of layoffs in the newsroom, it's hard to see anything good happening in the rest of the economy.

Yes, there are serious problems in the housing market, and yes, oil prices are at all-time highs, even after adjusting for inflation. As a result, it feels like things are getting worse rapidly. But the subprime mess will end up costing much less in real terms than the savings-and-loan crisis. Americans are spending about 7% of their total budget on energy, roughly the same as in 1970 and well below the peak of 9% in 1981. Once the Fed starts to lift rates again, oil prices should drop.

Americans have had it so good, for so long, that they seem to have forgotten what government's heavy hand does to living standards and economic growth. But the same technological innovation that is causing all this dislocation and anxiety has also created an information network that is as near to real-time as the world has ever experienced.

For example, President Bush put steel tariffs in place in March 2002. Less than two years later, in December 2003, he rescinded them. This is something most politicians don't do. But because the tariffs caused such a sharp rise in the price of steel, small and mid-size businesses complained loudly. The unintended consequences became visible to most Americans very quickly.

Decades ago the feedback mechanism was slow. The unintended consequences of the New Deal took too long to show up in the economy. As a result, by the time the pain was publicized, the connection to misguided government policy could not be made. Today, in the midst of Internet Time, this is no longer a problem. So, despite protestations from staff at the White House, most people understand that food riots in foreign lands and higher prices at U.S. grocery stores are linked to ethanol subsidies in the U.S., which have sent shock waves through the global system.

This is the good news. Policy mistakes will be ferreted out very quickly. As a result, any politician who attempts to change things will be blamed for the unintended consequences right away.

Both Mr. McCain and Mr. Obama view the world from a legislative perspective. Like the populists before them, they seem to believe that government can fix problems in the economy. They seem to believe that what the world needs is a change in the way government attacks problems and fixes the anxiety of voters. This command-and-control approach, however, forces a misallocation of resources. And in Internet Time this will become visible in almost real-time, creating real political pain for the new president.

In contrast to what some people seem to believe, having the government take over the health-care system is not change. It's just a culmination of previous moves by government. And the areas with the worst problems today are areas that have the most government interference – education, health care and energy.

The best course of action is to allow a free-market economy to reallocate resources to the place of highest returns. In the midst of all the natural change, the last thing the U.S. economy needs is more government involvement, whether it's called change or not.

Mr. Wesbury is chief economist for First Trust Portfolios, L.P.

Obama on the Nile

By THOMAS L. FRIEDMAN

This column will probably get Barack Obama in trouble, but that’s not my problem. I cannot tell a lie: Many Egyptians and other Arab Muslims really like him and hope that he wins the presidency.

I have had a chance to observe several U.S. elections from abroad, but it has been unusually revealing to be in Egypt as Barack Hussein Obama became the Democrats’ nominee for president of the United States.

While Obama, who was raised a Christian, is constantly assuring Americans that he is not a Muslim, Egyptians are amazed, excited and agog that America might elect a black man whose father’s family was of Muslim heritage. They don’t really understand Obama’s family tree, but what they do know is that if America — despite being attacked by Muslim militants on 9/11 — were to elect as its president some guy with the middle name “Hussein,” it would mark a sea change in America-Muslim world relations.

Every interview seems to end with the person I was interviewing asking me: “Now, can I ask you a question? Obama? Do you think they will let him win?” (It’s always “let him win” not just “win.”)

It would not be an exaggeration to say that the Democrats’ nomination of Obama as their candidate for president has done more to improve America’s image abroad — an image dented by the Iraq war, President Bush’s invocation of a post-9/11 “crusade,” Abu Ghraib, Guantánamo Bay and the xenophobic opposition to Dubai Ports World managing U.S. harbors — than the entire Bush public diplomacy effort for seven years.

Of course, Egyptians still have their grievances with America, and will in the future no matter who is president — and we’ve got a few grievances with them, too. But every once in a while, America does something so radical, so out of the ordinary — something that old, encrusted, traditional societies like those in the Middle East could simply never imagine — that it revives America’s revolutionary “brand” overseas in a way that no diplomat could have designed or planned.

I just had dinner at a Nile-side restaurant with two Egyptian officials and a businessman, and one of them quoted one of his children as asking: “Could something like this ever happen in Egypt?” And the answer from everyone at the table was, of course, “no.” It couldn’t happen anywhere in this region. Could a Copt become president of Egypt? Not a chance. Could a Shiite become the leader of Saudi Arabia? Not in a hundred years. A Bahai president of Iran? In your dreams. Here, the past always buries the future, not the other way around.

These Egyptian officials were particularly excited about Obama’s nomination because it might mean that being labeled a “pro-American” reformer is no longer an insult here, as it has been in recent years. As one U.S. diplomat put it to me: Obama’s demeanor suggests to foreigners that he would not only listen to what they have to say but might even take it into account. They anticipate that a U.S. president who spent part of his life looking at America from the outside in — as John McCain did while a P.O.W. in Vietnam — will be much more attuned to global trends.

My colleague Michael Slackman, The Times’s bureau chief in Cairo, told me about a recent encounter he had with a worker at Cairo’s famed Blue Mosque: “Gamal Abdul Halem was sitting on a green carpet. When he saw we were Americans, he said: ‘Hillary-Obama tied?’ in thick, broken English. He told me that he lived in the Nile Delta, traveling two hours one way everyday to get to work, and still he found time to keep up with the race. He didn’t have anything to say bad about Hillary but felt that Obama would be much better because he is dark-skinned, like him, and because he has Muslim heritage. ‘For me and my family and friends, we want Obama,’ he said. ‘We all like what he is saying.’ ”

Yes, all of this Obama-mania is excessive and will inevitably be punctured should he win the presidency and start making tough calls or big mistakes. For now, though, what it reveals is how much many foreigners, after all the acrimony of the Bush years, still hunger for the “idea of America” — this open, optimistic, and, indeed, revolutionary, place so radically different from their own societies.

In his history of 19th-century America, “What Hath God Wrought,” Daniel Walker Howe quotes Ralph Waldo Emerson as telling a meeting of the Mercantile Library Association in 1844 that “America is the country of the future. It is a country of beginnings, of projects, of vast designs and expectations.”

That’s the America that got swallowed by the war on terrorism. And it’s the America that many people want back. I have no idea whether Obama will win in November. Whether he does or doesn’t, though, the mere fact of his nomination has done something very important. We’ve surprised ourselves and surprised the world and, in so doing, reminded everyone that we are still a country of new beginnings.

Big Mac: The Taxpayer-Friendly Candidate

By Lawrence Kudlow

Sen. John McCain moved decisively to the supply-side Tuesday in a strong speech to the National Small Business Summit in Washington, D.C. For investors, small-business owner-operators, and the vast majority of middle-class Americans who go to work every day and are concerned about Sen. McCain's tax vision, this speech is good news. Big Mac is the taxpayer-friendly candidate.

The Republican candidate for president embraced low-tax-rate incentives to grow the economy, promising a combination of pro-growth tax reform and simplification along with significant spending restraint. He has called himself a foot soldier in the Reagan revolution. This tax speech clinches it.

McCain pledged to keep taxes low for families and employers, putting himself squarely in Ronald Reagan's camp and offering to extend the long prosperity wave started by the Gipper over twenty-five years ago. In contrast, McCain charged Obama -- who gave his economic speech on Monday -- with proposing the single-biggest tax hike in the entire post-WWII period.

McCain asserted that "no matter which of us wins in November, there will be change in Washington. The question is what kind of change?" Obama says a McCain victory will hand Bush a third term. McCain says an Obama victory gives Jimmy Carter a second term.

I think McCain gets it right.

Getting down to specifics, McCain said he will maintain the low income and investment tax rates put in place by President Bush. He singled out the need to keep the capital-gains tax rate at a low 15 percent, so that businesses will have the investment necessary to expand jobs, productivity, and real wages.

Completely unlike Obama, McCain is saying you can't have capitalism without capital. And he recognizes that investors must have high after-tax returns in order to take risks and fuel entrepreneurial activity. On this point, think high-risk energy technologies for clean coal, natural gas, oil shale, and nuclear and cellulosic power.

McCain repeated his plan to reduce the corporate tax rate to 25 percent from 35 percent. This could be his single-most-important tax reform. Not only will it enhance America's global competitiveness, since we have the second highest corporate tax among large countries. But a number of studies show that roughly 70 percent of the benefits from a lower corporate tax will flow to the workforce in the form of higher real wages and more jobs.

McCain also pledged to keep the estate tax low to reward family businesses. Overall, he would seek a flatter and simpler tax system, probably modeled on Rep. Paul Ryan's idea of two rates of 25 and 15 percent. McCain also discussed several middle-class tax cuts, such as doubling the child tax exemption and phasing out the alternative minimum tax. For businesses, McCain added a first-year cash-expensing provision for the write-off of new equipment and technology.

McCain coupled all this with a pledge to veto earmarks and pork-barrel spending. He held out as an example the outrageous $300 billion farm bill that drew Obama's vote. McCain would go after corporate welfare and freeze discretionary spending outside of the military. And he made an especially strong case for the free-trade policies that have been so important to U.S. economic growth.

The McCain-Obama contrast couldn't be more stark. Obama wants to use the tax system to redistribute income and wealth, not to grow the economy. He constantly talks about rewarding work over wealth. This is pure class warfare.

Obama doesn't seem to understand that our nation was founded on the principle of equality of opportunity, and that private enterprise, not government, is the main economic driver. Obama intensely dislikes businesses. He would repeal all the Bush tax cuts and raise the corporate tax.

Obama talks about the need for bottom-up economic growth. But this is a canard. He's pure top-down when it comes to big-spending government programs.

Obama singled out the ownership society, calling it a "worn dogma." In fact he misjudges modern America, which is dominated today by 100 million investors, 25 million small-business owners, nearly 70 million homeowners, and roughly 140 million people who go to work everyday in the corporate world.

Obama opposes free trade. And though he has tried to hedge his bet on this point, it will never sell in this YouTube election.

Earlier in the campaign, he became the candidate of 1970's scarcity and limits when he asserted that "we can't drive our SUVs and eat as much as we want and keep our homes on, you know, 72 degrees Fahrenheit at all times, and then just expect that every other country is going to say okay."

Ironically, it's Sen. McCain who is saying "Yes we can." We can grow. We can prosper. We can be confident about the future. He's saying that with the right economic policies, America's outlook will know no bounds.