Yes, He Can—If He Remembers JFK

11/10/2008 10:05 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

The stock market is always right. Nonetheless, I must admit to being more than a little annoyed that the stock market greeted the election results with a two-day nosedive approaching 1,000 points. Even last Friday’s gain could not erase the sting.

It smacked of Wall Street pique that the next president appears to be no friend of “the Street.” But the economic platform of our new president came as no surprise, so why the sell-off? 

Yes, the president-elect has said he would raise capital-gains taxes, which would represent a hit to those who still have any capital gains remaining. But the smart money had already priced that fact into the stock market, selling earlier in the campaign as momentum for Senator Barack Obama picked up.

And certainly president Obama will take a more populist approach to digging America out of its economic mess. But realistically, how much more could Wall Street have expected in the way of aid from the government? More than a trillion dollars has already been injected directly into the banking system by way of guarantees and capital stock purchases. 

With the global financial markets resisting transparency, clarity, and centralized clearing of transactions, all the liquidity in the world won’t restore trust and spur lending. So, why not try from the other end—by helping the debt-ridden consumer?

But as we try a different approach to restoring our economic growth, all the hope in the world can’t deny economic reality. The loss of 240,000 jobs reported last Friday and the increase in unemployment to 6.5% in October demonstrated the immediate need to grow the economy. Now, investors will have even higher expectations of some sort of government-directed public works program.

The real issue is how to pay for all of this spending. And on that score, president-elect Obama may have a very appropriate role model in the actions of president John F. Kennedy.

It was Kennedy who famously said: “Paradoxically, the way to increase tax revenues is to cut tax rates.” It is such an important principle that I added the italics for emphasis! 

When Kennedy became president, the top personal tax rate was 90%. That’s not a typo. Almost every penny of the last dollar earned by top wage earners went to the government—and the economy was stagnant. 

President Kennedy became the largest tax cutter in American history at that time, cutting the top personal tax rate from 90% to 70%. He also cut the top corporate tax rate from 52% to 48%.  Unfortunately, he did not live to see the resulting spurt in growth which came to be known as the “Kennedy boom.”

Cutting taxes to spur economic growth is not a Republican vs. Democratic issue. It is a growth versus stagnation issue. And since the top 10% of tax returns produce 60% of the tax revenues, that is where rates will have to be cut in order to produce more jobs, more economic growth, and then more tax revenues.

President-elect Barack Obama has given ample demonstration of his insight, intelligence, and appreciation of his place in history. That is why the world—and the markets—should be filled with hope. He has an opportunity to make a real impact—if he follows the example of one key Democratic forbear.

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