Monday, December 8, 2008

Where to Draw the Bailout Line?

The bailout-nation saga continued this week as the little-three carmakers from Detroit drove to Washington to plead for a $34 billion federal package to save themselves from bankruptcy and insolvency. Hot on their heels was a devastating report of 533,000 lost jobs in November. Actually, it’s a loss of 732,000 jobs, including downward revisions from the
prior two months. Unemployment moved up to 6.7 percent from 6.5 percent, a number that’s going to get worse as the volume of discouraged workers continues to rise.

So here’s the painful choice for both Republicans and Democrats in Congress: Will the political class risk a Detroit-carmaker bankruptcy that might lead to catastrophic liquidation — including, realistically, a couple million car-related jobs — all while the recession deepens and job losses mount (1.2 million in just the past three months)?

It’s a tough choice — especially for Republicans, most of whom want to vote against bailout nation and stop big-government encroachment on our free-market economy. That’s the right theory. But are the economic risks simply too great to employ it?

Various polling surveys say bailout nation, and a federal rescue for autos in particular, is very unpopular. At least 60 percent are polling against a bailout. The TARP bailout of banks is increasingly unpopular.

Meanwhile, the pressure for more bailouts grows daily. The Avis rental-car company wants a bailout from TARP. A company called BlueFire Ethanol wants a bailout. The trade association for equipment-leasing companies wants a bailout. There’s no end to it. And if we keep going down this path we’ll make a mockery of free-market capitalism.

Where to draw the line? That’s the huge political question.

Coming back to Detroit, there may be a pragmatic solution, one that takes some of the apocalypse-now threat of major economic decline out of play. Senator Bob Corker and others have proposed a federal oversight board that would in effect become a bankruptcy court. Strict conditions would be imposed on the carmakers, especially regarding compensation — the single-biggest reason for Detroit’s decades-long decline.

Corker wants Detroit to have the exact same compensation levels as the Japanese transplants in the non-union Southern states. That means moving hourly labor costs down from roughly $70 to $48. It means reopening the UAW contracts that have created the huge pay-gap between Toyota and GM. It means putting an end to excessive pension and healthcare benefits.

According to Professor Mark Perry of the University of Michigan, GM healthcare benefits add $1,500 to the price of every vehicle, while pension costs add another $700 per car. That will have to end. The lucrative jobs bank that pays laid-off workers 95 percent of their compensation also will have to stop. And bondholders will have to be satisfied with a complete renegotiation of GM’s $62 billion in debt, including the union retiree healthcare fund that is under-funded by $30 billion.

There still will be considerable job losses for downsized Detroit carmakers. They’ll have to cut a huge chunk of their dealer networks. Domestic brands will have to be sharply reduced. But essentially, as would be the case under Chapter 11 bankruptcy, the federal government will
provide short-term financing while Detroit goes through its radical restructuring. It looks like bankruptcy lite, and it will completely change the direction of the former Big Three.

It’s probably too much to ask, but tough federal action under the aegis of oversight-board enforcement also should relieve the CAFE fuel standards that have plagued U.S. automakers. At the very least, worldwide standards should be substituted for domestic ones. Making expensive small green cars is an unprofitable business.

Ironically, with oil and retail gasoline prices plunging, it’s not unreasonable to expect something of an auto-sales recovery. Gas prices have dropped all the way to $1.75 from over $4. This tax cut will help revive the whole economy, along with auto sales.

But if Washington can put this car-bailout business behind it, perhaps Congress can move on to the ultimate solution: restoring economic growth. President-elect Obama has been cagey about the details of his massive $700 billion infrastructure spending plan and whether he’ll raise taxes on successful earners. But this new New Deal, including Obama’s middle-class
tax credits, will not create permanent economic growth incentives. What will? A genuine supply-side growth agenda to reduce tax rates across-the-board.

If the Republican party wants to put bailout nation to rest it should campaign for lower corporate, individual, and investment tax rates. It should make clear that the Democrats are the government-spending party while the Republicans are the tax-cutting party.

We will not bailout our way into prosperity. Nor will we spend our way into prosperity. Somebody has to stand up and yell: It’s time to cut tax rates on the supply-side. That will reinvigorate growth and infuse new spirit into a demoralized economy.

Wednesday, November 26, 2008

Robert Mundell’s New Wisdom

New economic stats on consumer spending and business durable goods investment show an economy that’s sinking fast across-the-board. Wall Street economist John Ryding expects a 4 percent drop in fourth quarter real GDP.

Of course, the Fed is pouring in new cash hand-over-fist. And plunging retail gas prices to about $1.85 per gallon nationally amounts to a huge consumer tax cut of perhaps $320 billion, according to Mark Perry of the University of Michigan. So we’ve moved from tight money and an energy tax hike a year ago, to easy money and an energy tax cut today. The former mix has generated a nasty credit crunch and a recession. But the new monetary/energy mix will generate recovery next year. I hope.

At a wonderful dinner last night I had a chance to talk to Nobel Prize winning economist Robert Mundell about all things economic. What is to be done? I asked him.

Mundell, you may remember, was a leading supply-sider in the Reagan revolution. He argued for low marginal tax rates to spur the economy and a stable dollar to eliminate inflation. Bob Mundell also is the father of the euro. He is plainly an incredibly brilliant and distinguished

The dinner was put together by the indefatigable hard-money analyst Judy Shelton, a pretty smart gal herself. Our spouses were there along with some friends.

So here’s Mundell’s latest take on a pro-recovery, fiscal-monetary, growth mix. First, he’d like to see a complete corporate tax holiday for one year. He then favors corporate tax reform that would drop the current top rate from 35 percent to 15 or 20 percent. He believes this would generate badly needed business investment and job-creation to fight recession.

Incidentally, in today’s durable-goods business-investment report for October, capital-goods shipments are falling at a 12 percent annual rate versus their third-quarter average. Orders are down 35 percent. (By the way, that third-quarter average was a negative number.)

So Mundell is clearly on to something. Business needs help. Without healthy business, there will be no significant new job creation or consumer spending power.

On money, Mundell had two interesting thoughts: First, the U.S. dollar and the Chinese yuan should basically be re-linked at roughly today’s exchange rate (about 6.8 yuan to the dollar). There should be no more Chinese currency appreciation. Incidentally, Mundell thinks the Chinese economy is actually in some trouble. And he’d know. Mundell travels to China about once every other month as a key advisor to the Bank of China.

Also on the currency front, Mundell would prefer a floor under the euro at roughly $1.25. That’s about where it is today. It’s also roughly the same as the original $1.18 euro initial public offering in 2000. So Mundell is pressing for dollar stability relative to Europe and China. And he believes
that would be consistent with domestic price stability here at home.

Unfortunately, Fed head Ben Bernanke simply doesn’t think in these global currency terms. Mundell has no real problem with the Fed’s huge balance-sheet expansion to push new cash into the credit-crunched recessionary economy. He believes there is a huge demand for dollars at
home and overseas, and that the Fed should be accommodating this.

But Mundell frets that Bernanke is too much of a Phillips-curve unemployment-rate targeter, and that he doesn’t understand the powerful influence of a sound currency policy.

Putting it all together, Mundell’s anti-recession program is a reduction of the high marginal tax rate on business to reignite growth along with a stable dollar to contain inflation.

We also got around to talking about Paul Volcker, who is a friend of Mundell’s. He’s also my former boss from 1975, back when I was a young staffer at the New York Fed and Paul Volcker was the bank’s new president. Volcker, of course, has been counseling Barack Obama during the financial crunch. And today, the president-elect appointed Volcker, the former Fed chair, to be the head of a new White House advisory board on the economy. This advisory board takes a page from Ronald Reagan, who set up PEPAB, the President’s Economic Policy Advisory Board, back in 1981. Members of that group included Milton Friedman, Art Laffer, Alan Greenspan, Arthur Burns, Herb Stein, and others. George Schultz was the first chairman. This group helped sustain Reagan’s supply-side policies during some difficult times in 1981-82.

Now, no one really knows what Paul Volcker really thinks about the myriad TARP financial-rescue packages being run by the Treasury, the Fed, and the FDIC. Nor do we know what Volcker thinks about the Fed’s ballooning balance sheet, or U.S. dollar policy for that matter. A lifelong Democrat, Volcker is properly credited with slaying inflation in the 1980s. But he is no supply-sider.

Presumably, however, the conservative-Keynesian Volcker, along with Tim Geithner, Larry Summers, and Christina Romer, will advise Obama not to hike taxes in the next two years.

But that’s a presumption. We don’t know who else will be on this Obama economic advisory board. Might they consider a stable dollar and a big corporate tax cut? Well, if Volcker listens to his friend Mundell, he’ll gain some important advice to be passed along to the new president-elect.

Thursday, November 13, 2008

Bush Shows Obama the Way

President George W. Bush came out fighting for free markets with a strong and stirring defense of American capitalism on the eve of the G-20 World Economic Conference. Stocks soared 550 points Thursday as Bush’s luncheon speech was played live on all the major cable networks. It was as though Mr. Bush was trying to leave an economic-primer to his successor-elect Barack Obama. Markets cheered because it’s the best thing they’ve heard in many weeks.

Here’s one of several great passages from Bush: “At its most basic level, capitalism offers people the freedom to choose where they work and what they do … the dignity that comes with profiting from their talent and hard work. … The free-market system also provides the incentives that lead to prosperity -- the incentive to work, to innovate, to save and invest wisely, and to create jobs for others.”

In other words, free-market capitalism is the best path to prosperity.

During a gloomy period of financial crisis, recession, big-government rescues, and ailing banks and industrial companies, Bush has provided a strong visionary dose of big-picture economic prosperity and optimism that can lead the U.S. and the rest of the world out of its economic doldrums.

Here’s another uplifting passage from Mr. Bush: “Free-market capitalism is far more than an economic theory. It is the engine of social mobility -- the highway to the American Dream. And it is what transformed America from a rugged frontier to the greatest economic power in history -- a nation that gave the world the steamboat and the airplane, the computer and the CAT scan, the Internet and the iPod.”

Capping all this off, Bush said, “The triumph of free-market capitalism has been proven across time, geography, culture, and faith. And it would be a terrible mistake to allow a few months of crisis to undermine 60 years of success.”

That reference to 60 years harkens back to the original post-WWII economic-rebuilding conference held in Bretton Woods, N.H., in July 1944. At that historic meeting, the U.S. and Britain led 170 delegates from around the world into a new era of free markets, free trade, and stable currencies. It was a conference of global coordination that broke down the isolationist and protectionist sentiments that upset the world order so badly during the prior 15 years.

Ultimately, the free-market system forged at Bretton Woods, which was in no small way predicated on economic prosperity, led to a triumph of Western values over Soviet state socialism. And it was President Reagan -- along with his friend, British Prime Minister Margaret Thatcher -- who applied the final blow to the now-defunct Soviet system with his rejuvenation of free-market capitalism.

So what George W. Bush seems to be saying is this: Do not discard that triumphal system just because we’ve had a rough year in the financial markets and the economy.

In a few weeks Barack Obama will inherit the mantle of the capitalist system. What will he do with this responsibility? That’s the question being asked everywhere.

Since the election, and up until President Bush’s important G-20 speech, stock markets sold off nearly 15 percent. Investors want to know if economic rewards will be encouraged or penalized. Will trade remain open and free? Will we maintain competitive businesses that can compete worldwide? Or will we resort to the protection of ailing or failed businesses?

Will the U.S. lurch toward the semi-socialism of Old Europe? Or will we stay with free-market capitalism? Will we expand the nanny-state economy? Or will we keep the door wide open to entrepreneurial spirit and gales of creative destruction?

Investors want to know which way President-elect Obama is going to go. Might he reach back to the Democratic pro-growth supply-side policies of John F. Kennedy’s tax cuts, free trade, and strong dollar? Will he opt for Bill Clinton’s free-trade and strong-dollar policies, or even his capital-gains tax cut? Or will he fall back to the hopeless government tinkering of Jimmy Carter or the welfare-statism of Lyndon Johnson?

I’m keeping an open mind on Mr. Obama during this post-election honeymoon period. After all, he stole the tax-cut issue from Sen. McCain during the election. And surely he knows the conservative red states that joined his campaign for change didn’t vote for a leftward lurch to socialism lite.

Mr. Obama has a huge opportunity and an outsized responsibility to mend and revive the economy. It may be too much to ask, but perhaps he will give President Bush’s marvelous speech a close read. There is much wisdom there. And there is no iron-clad reason why a Democrat can’t adopt the economic-growth model that has worked so well and so long for this country.

Paulson's Rescue Plan Adjustments

Remember that huge congressional swing-out two months ago over the Treasury's request for $700 billion to purchase at auction a bunch of toxic assets that no one wanted to buy? And remember John McCain's curious behavior, temporarily shutting down his campaign in order to fly to Washington and save the nation from financial collapse? (Some say that
episode sunk Big Mac's campaign.)

Well today, Treasury man Paulson announced that there probably won't be any toxic asset purchases after all. Instead, he intends to forge ahead with more capital purchases to strengthen bank balance sheets and also, by the way, non-banks, which lend roughly 40 percent of total consumer credit. Think AMEX, GE Capital, maybe GMAC, and others.

Actually, Paulson has a good idea for a private capital injection into banks (and maybe non-bank lenders) that would then be matched by taxpayer capital. This was a good idea proposed a while back by Harvard economist and former Bush advisor Greg Mankiw. The more private capital the less the government-takeover threat and the healthier the banks will be.

But there's more from Paulson today. He talked at some length about Treasury assistance for securitized credit-card student-loan and auto-loan assets, and he said the Fed is designing a lending facility to meet liquidity needs for asset-backed securities and their sponsors. This securitized-loan business is a whole new avenue of rescue operations. And it surely opens the
door to a lot of non-banks that are going to play in the Treasury's sandbox.

Mr. Paulson also said the Treasury is looking at FDIC chair Sheila Bair's multi-billion dollar loan-guarantee program for foreclosure mitigation. This really means Uncle Sam will wind up eating some significant losses while the interest and principal on shaky mortgage loans
are written down.

Stocks were off big today — before, during, and after Paulson — closing down over 400. Tough to pin it on the Treasury man, however, since the plunge started in the early-morning well before he spoke.

Some folks think the stock market is stalking Obama, whose defining moment may be a GM bailout. Plus, investors are waiting for a new Treasury appointee who will shed light on Obama's tax and trade threats for 2009 as well as his UAW rescue mission that is so strongly favored by Speaker Pelosi and Senate Majority Leader Harry Reid. Policies protecting
ailing industries would certainly set a France-like tone for the new administration.

Here's a stat from my friend, blogger Mark Perry: Total compensation per hour for the big-three carmakers is $73.20. That’s a 52 percent differential from Toyota's (Detroit South) $48 compensation (wages +health and retirement benefits). In fact, the oversized UAW-driven pay package for Detroit is 132 percent higher than that of the entire
manufacturing sector of the U.S., which comes in at $31.59.

I don’t care how much money Congress throws at GM. With that kind of oversized comp-package they are not going to be competitive. It’s throwing bad money after a bad cause. What a way to start the new Obama era.

I would still argue that rescuing banks and consumer credit companies removes systemic risk from our lending system. But the only thing systemic about the GM bailout is the hegemony of the UAW. Or maybe I should be more cynical: Republican socialism followed by more Democratic socialism.

Monday, November 3, 2008

Is Obama Swiping the Tax Cut Issue?

Voters seem to think he’s the Ronald Reagan tax-cutter of the 2008 election.

Wouldn’t it be the height of irony if Barack Obama wins this election as the Ronald Reagan tax-cutter? His tax plans are severely flawed and his campaign narrative to support them is all wrong. And yet a recent Rasmussen poll shows that 31 percent of voters believe Obama is the real tax cutter, while only 11 percent choose McCain.

Believe it or not, Obama seems to have swiped the tax-cut issue from the Republican party. How can this be?

Well, for almost two years Obama has talked about cutting taxes for 95 percent of the people. McCain has no such record. And even though McCain has launched a strong Joe the Plumber investor-class tax-cutting surge in the last days of the campaign, it may not be enough to significantly impact Tuesday’s voting results.

This is bad news since Obama has some pretty strange views on taxes. Just look at his recent explanation for the decline in third-quarter GDP. He calls it “a direct result of the Bush administration’s trickle-down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years and plans to continue for the next four.”

Is Obama really blaming the Bush tax cuts for this recession?

After the bursting of the tech bubble and the 9/11 attacks, George Bush lowered tax rates across-the-board for individuals and investors. For five years the stock market rallied without interruption -- the longest bull market without a correction in post-WWII history -- while the economy expanded for six years, a bit longer than the average post-war recovery cycle.

And Obama wants folks to believe that tax cuts caused this downturn? Not the credit shock? Not the Obama-supported government mandate to sell unaffordable homes to low-income people and the pressure on Fannie and Freddie to securitize these loans? Not the oil shock?

No self-respecting Keynesian would buy into this. Yet Obama was at it again in Monday’s Wall Street Journal, saying, “It’s not change to come up with a tax plan that doesn’t give a penny of relief to more than 100 million middle-class Americans.”

Regrettably, not even John McCain has contradicted this. But the facts speak otherwise.

For example, the nonpartisan Tax Foundation says the Bush tax cuts -- which McCain would maintain -- provided substantially more relief than middle-class Clinton-era tax rates: A single earner making $30,000 will pay $2,756 under 2008 Bush tax law compared with $3,157.50 under Clinton tax law (in 1999). That’s a larger Bush tax cut by 8.7 percent. A married couple earning $50,000 will pay $4,012 under Bush compared with $5,085 under Clinton. That’s a bigger Bush tax cut by 21 percent.

So the facts of a middle-class tax cut are far different from what Obama claims. Obama also says his tax rates will be below those of Ronald Reagan. Wrong. Obama will raise the top rate to 39.6 percent, whereas Reagan left taxpayers with only two brackets of 15 and 28 percent.

Incidentally, the income cap for Social Security and Medicare taxes was about $42,000 when Reagan left office, compared with $104,000 today and the threat that Obama will raise that cap significantly.

It’s also worth noting that the Reagan tax-reform bill of 1986 mistakenly allowed the capital-gains tax rate to move up to 28 percent from 20 percent. Many believe this was a significant factor in the stock market crash of 1987.

Similarly, Obama intends to raise the cap-gains tax rate from 15 to at least 20 percent. It’s a risky move. Of course, Obama says only rich people will pay the higher cap-gains rate. But the reality is that a cap-gains tax hike will raise the after-tax cost of all capital, which will depress the future value of all equity assets.

McCain has recently proposed a reduction in the capital-gains tax rate from 15 to 7.5 percent. With 100 million-plus investors out there, and nearly two of every three votes in national elections being made by shareholders, this is right on target. Last Friday, McCain told me in an interview that a “low capital-gains tax is probably the greatest incentive for investment that we have in America today.

In the frenetic final hours of the campaign McCain is also talking up his corporate tax cut, which would be a tremendous boost to plunging stock prices since corporate profits are the mother’s milk of stocks. Indeed, McCain’s overall tax-cut plan is far more powerful than Obama’s when it comes to creating jobs and stimulating economic growth. But his marketing effort appears to be too little, too late.

These things do, however, have a way of balancing out: If Obama and the Democrats go on a tax-hiking spree to penalize successful earners and investors, they will pay for it dearly in 2010 and beyond.

Friday, October 31, 2008

My Interview with Senator McCain

What follows below is a transcript of my interview earlier this morning with Senator John McCain on the investor class and the stock market. Big Mac is talking tax cuts on capital gains, businesses, and individuals. There is no question that he is energized. Politically, he is still running even with Obama among investors. That is not good. Is there time for Senator McCain to break through and run up his margin with this crucial voting block?

Larry Kudlow: Let me go back to the first question, which you were beginning to answer. We've had this terrible stock market slump. Some say $3 trillion dollars worth of wealth have been lost by investors in the investor class. And I was asking, and I think you were answering, what is your plan to create some recovery in the stock market?

Senator McCain: Keep taxes low, cut spending, create jobs with alternative energy, including nuclear power plants, including drilling offshore, wind, tide, solar. Free us from our sending $700 billion or whatever it is across to countries that don't like us very much.
Free up credit. Larry, I’ve been meeting with a lot of small businesspeople, and they're having great difficulty getting lines of credit. This is something we've got to free up. Now, we have given the banking, the banks and other institutions the kind of infusion they need. It's time they pass that on to small businesses who say they can hire. They've got business, but they just haven't got the line of credit.

But make sure that everybody knows that we're going to keep taxes low. We're not going to raise taxes. We're the creator of business and the engine of our economy and small business, Senator Obama's proposal would tax half of all small business income, some 16 million jobs in America would be at risk. And then you put on top of that, he will force his mandated health care plan on small businesses, their employees, and their children. It's not good for America.

Kudlow: Just on the credit piece that you mentioned a few moments ago, have you and your campaign been following the improvement in the Libor credit market in London and the commercial credit markets here in New York? It looks like the Treasury plan is beginning to work. That may be a positive sign. Do you follow those areas?

McCain: Yeah, I do, and I get updates all the time. One of the areas that I’m still very disappointed in, though, Larry, and you may not agree with me, we've got to go in and get these home mortgages bought and give people mortgages they can afford so they can stay in their home. Look, I’m in Ohio. Homes are being foreclosed everywhere. A lot of these people, it's their primary residence, could stay in their home if they had a new mortgage at the new value of their home, at payment levels they could afford. That is the slow -- one of the slowest parts. I think it's the slowest part right now. Keep people in their homes. If they can't realize the American dream and stay in their homes, then obviously, the rest of this equation is hard to complete.

Kudlow: Let me swing back to the investor side. There are about 100 million investors, according to the Federal Reserve survey. And interestingly, in recent national elections, they're a huge voting block, almost two of every three votes cast are cast by people that own stocks either directly or indirectly. And yet, sir, you very, very seldom mention investors on the campaign trail. Why is this?

McCain: Well, I try to talk about them more often. A lot of the people that come, frankly, are people that are having trouble staying in their homes, keeping their jobs, et cetera. But I think it goes back to all this business of Senator Obama's view of "fairness." When Charlie Gibson said, why would you want to raise capital gains taxes when you know it will decrease revenue? And he said in “fairness”. And he told Joe the Plumber -- Joe the Plumber got the message through better, what we've been trying to do this whole campaign. [Obama] wants to "spread the wealth around." That takes from the investor class. That takes money from one group of Americans and gives it to another. Now that signal has been very clear. And I think people ought to pay attention to it, because it's been tried before in other countries, and policies of other left, liberal administrations. It doesn't work, and it's bad for America. We want to encourage the investor class, and that means capital gains and dividend taxes are low.

Kudlow: You've just unveiled a new tax cut on capital gains. Can you tell us about that? Because in some sense, that's probably the most important investor class tax.

McCain: It's the most important in many respects, Larry, and we want it low and we want it lowered. Every time -- there's one tax that there's no argument about, that every time it's been lowered since Jack Kennedy, we have seen an increase in revenues. Now, why anybody would argue, as Senator Obama does, that we need to raise it, even if it's -- of course, the amount needed to raise it is varied with whatever poll he's taken, but the point is that we want to lower it and keep it low and encourage investment, especially now in America in these difficult times.

Kudlow: But Senator, what is -- the current law rate is 15%.

McCain: Yeah, yeah.

Kudlow: You're taking the cap gains rate down to what?

McCain: First down to 10%, I would like to see it, and gradually even make it lower. Look, why should we tax people's gains twice? Why should we tax them twice, okay? They make an investment, they should be able to get their returns on their investment. And capital gains is obviously -- low capital gains tax is probably the greatest incentive for investment that we have in America today. And so, look, I’ll be glad to listen to smart people like you, Larry, but the worst thing we can do is tell people we're going to raise it, and that, obviously, would chill investment in America, right?

Kudlow: Well, with your lower capital gains tax, which in a recent speech you said 7.5% for two years, are you surprised, though, that respected pollsters like Scott Rasmussen or Investors Business Daily are still showing you running neck and neck, even with Mr. Obama? Back in 2004, President Bush beat John Kerry by 11 percentage points among investors. Now, you've got a lower cap gains tax. Mr. Obama proposes to raise the cap gains tax from 15% to 20%. Except you're still running even in the polls. Can a Republican win running even among investors? And why don't you think your message on capital gains has resonated with a bigger margin among investors?

McCain: I'm not sure, except obviously, when he broke his word that he would take public financing if I also did, he signed a piece of paper, that obviously, he's had a huge money investment. Look, I’m a 7.5%, I’d like to keep it permanently at 7.5%. Right now, we need more investment in America and in the stock market and in businesses and investment than ever before in these difficult times. So, it's pretty clear that if we keep them low, we will provide another tool for encouraging investment. Look, we are -- I am so happy we are where we are. I see a level of enthusiasm out here in this campaign, Larry that is remarkable. I haven't seen this level of enthusiasm before. I'm very optimistic, and we're coming from behind. I'm the underdog. That's where we always like to be. But we are within margin, and I’m very happy where we are.

Kudlow: Another really important tax for the stock market investors, of course, is corporate profits. Profits are the mother's milk of stocks, as I have said from time to time. You've proposed to lower that from 35% to 25%. Senator Obama says the other day, that's merely another huge and permanent tax cut for corporations, including $4 billion dollars for the big oil companies, but it is no help for workers. Would you react to Mr. Obama's criticism of your corporate tax cut?

McCain: He doesn't get it. Corporate tax rates in America are the second highest in the world. Japan is only higher. Ireland has 11%. Business -- I like to call them business taxes, because that's what they really are, because they're businesses and they create jobs and they create employment. And when businesses can go anyplace in the world, where are they going to go? Look, I can name you Fred Smith of FedEx, Meg Whitman, other CEOs who will tell you, when they have a choice to go around the world and pay less in taxes where they can invest more and increase businesses and jobs, they're going to do that. Obviously, they want to stay in America. And they want to create jobs in America, and they will, but we want to give them the incentive to do so. And lowering the business tax, the corporate taxes, in my view, they should be lower than 25%. Why is it that we're the second highest in the world, when 20 or 30 years ago, we were amongst the lowest in the world? It's not an incentive to businesses and jobs in America. It shows, frankly, that Senator Obama just doesn't get it.

Kudlow: You said yesterday or the day before when you were in Miami, Florida, the Democratic Congress is going to remove tax incentives or tax preferences for 401(k) accounts. Of course, that is a huge investor issue. What did you mean by that? What is the plan that Democrats want to take away from 401(k)s?

McCain: Well, that's exactly what they're saying. And Barney Frank, who is powerful, chairman of a powerful committee in the House, said we're going to raise taxes and we're going to increase spending. That's exactly the wrong thing to do in the economic difficulties we have. How did we get into this ditch? We ran up a $10 trillion deficit on our kids and half a billion dollar debt to China. So, obviously, they want to take the 401(k)s and use that money to give that to the government to spend, rather than people, and I think that's very dangerous disincentives to savings, which is exactly the cause of one of our problems, as we all know.

Kudlow: Last one, Senator, and I appreciate your time very much. Americans have an innate sense of optimism and confidence about stocks and the economy. The Rasmussen poll shows 73% believe stocks will be much higher five years from now than they are today. Is there a way for you in the closing days of this campaign to appeal to the innate sense of optimism that Americans have? Is there a way for you to connect with the investor class?

McCain: Well, I hope we've connected with the investor class by them examining our plans as we come closer to the election. But I also have to tell you, Larry, the people who want to invest are Joe the Plumbers of this world who want to own their small business. They want to employ people, and they want to invest in their futures and in the stock market and make investments, 401(k)s, IRAs and others, so that they could ensure their retirement and their future. And Joe the Plumber was able to do something that we hadn't been able to do this whole campaign, and that is articulate the reason why he doesn't want to see his taxes raised so that he can use it to buy a business and create jobs and to take care of his and his family's future. That's what this campaign is boiling down to, and that's why we're getting closer and closer, my friend.

Kudlow: All right, Senator McCain, thank you ever so much for sharing your time. Good luck in the rest of the campaign, sir.

The Dumbest Story Ever Told

Today’s GDP report showed a small contraction of 0.3 percent. But stocks went up nearly 200 points anyway. Many observers believe the thirdquarter downturn was not a catastrophe, especially if you factor in hurricanes and the Boeing strike. On top of that the short-term tax rebates ran out in the third quarter, and that helped depress consumer spending, which did fall 3.1 percent.

However, inventories are quite low after three quarterly declines. And business capex shipments actually rose slightly in the three-month period ending in September. So there’s no collapse, at least yet, in business investment.

Most analysts expect a much worse drop in the fourth quarter, ranging between a 3 and 4 percent contraction. But they are not factoring in a roughly $200 billion annual drop in consumer energy expenses that will accrue from the collapse of oil and gasoline prices. This is going to be a big consumer booster.

Meanwhile, credit markets continue to defrost and commercial paper is now rising again, as is inter-bank lending. So the economic story may not be near as bad as the consensus thinks. Remember, of course, the Fed is pumping in cash at a huge rate. That’s going to help the whole story.

The dumbest thing I heard today on the economy was a statement from Sen. Obama. He says the decline in GDP is “a direct result of the Bush administration’s trickle down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years and plans to continue for the next four.”

Wait a minute. Did I miss something here? After the bursting of the tech bubble and the 9/11 attacks, George Bush lowered tax rates across-theboard for individuals and investors. The stock market rallied uninterruptedly for five years. The economy expanded from the end of 2001 to the end of 2007. Are we to really believe the Obama narrative that cutting tax rates is the cause of this downturn? Not the credit shock? Not the Obama-supported government mandate to sell unaffordable homes to low-income people and to pressure Fannie and Freddie to securitize these loans? And not the oil shock, as well?

It was really tax cuts that caused this recession?

That’s the dumbest story ever told.