[Congressional Record (Bound Edition), Volume 145 (1999), Part 4]
[Extensions of Remarks]
[Page 5033]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         THE ROAD TO DOW 10,000

                                 ______
                                 

                         HON. MICHAEL G. OXLEY

                                of ohio

                    in the house of representatives

                        Thursday, March 18, 1999

  Mr. OXLEY. Mr. Speaker, I would like to bring a Wall Street Journal 
column by Lawrence Kudlow to the attention of my colleagues. The 
subject is the strength of the stock market and the ongoing economic 
expansion.
  The point of the piece is that sound economic policy making begets 
solid economic growth. Put more precisely, the absence of anti-growth 
policies allows free markets to flourish. Economic freedom in the form 
of low tax rates, deregulation, free trade, and restrained government 
spending leads to increased private investment, low inflation and a 
booming national economy.
  Again Mr. Speaker, I commend the following column to the attention of 
all interested parties.

             [From the Wall Street Journal, Mar. 16, 1999]

                         The Road to Dow 10,000

                          (By Lawrence Kudlow)

       The Dow Jones Industrial Average stands at the threshold of 
     yet another milestone, this time 10,000. Meanwhile the 
     longest continuous prosperity in the 20th century, begun in 
     late 1982 and, interrupted only by a short and shallow 
     recession in 1990-91, continues apace. These facts are worth 
     pondering, for a proper understanding of them can instruct us 
     toward the best future economic policy.
       The current stock market boom began in mid-1982 and is now 
     the second longest in the century, exceeded only by the post-
     war 1949-68 cycle. Since August 1982 the Dow Jones average 
     has appreciated 1,095%, or 615% in inflation-adjusted terms. 
     The economy has posted a 3.2% yearly real rate of increase, 
     while real corporate profits have expanded by 6% annually. 
     Thirty-nine million net new jobs have been created, largely 
     from nearly 11 million new business start-ups.
       Roughly $25.7 trillion of new household wealth has been 
     created, according to the Federal Reserve. Long-term Treasury 
     bond yields, they key discount rate used to calculate the net 
     present value of future corporate earnings, have dropped to 
     5.5% from roughly 15%. Inflation has fallen to almost zero 
     from nearly 11%, even while the unemployment rate has dropped 
     to 4.4% from 11%.


                           Pessimistic Gurus

       Yet since 1982 most economic and investment gurus have 
     preached pessimism. For 17 years they have told the public 
     that neither the bull market nor the prosperity can last, 
     because of budget deficits, trade deficits, savings 
     shortfalls, high real interest rate, capacity constraints, 
     inadequate productivity, subpart real wages, inflation 
     threats, Philips curves, market bubbles, income inequity, 
     Asia, Russia and a variety of other reasons.
       Yet the experts have been proved wrong; optimism has 
     prevailed. Actually, the stock market itself is a much better 
     measure of economic progress than a barrelful of government 
     statistics. Market prices reflect the collective judgment of 
     millions of profit-seeking individuals who buy and sell each 
     day based on their expectations of future wealth creation.
       Why has the outlook for wealth improved so dramatically? In 
     a word, freedom. Freedom creates wealth, and wealth boosts 
     stock prices. Economic freedom was decisively restored by 
     policies launched during the 1980s. This led to a revival of 
     the risk-taking and entrepreneurship that is so vital to a 
     dynamic economy.
       President Reagan's policies, which are mostly still in 
     place today, removed the barriers to growth that made in 
     1970s the worst stock-market economy since the '30s. Strong 
     disinflation restored purchasing power and reduced interest 
     rates. In other words, the ``inflation tax'' on money was 
     repealed, Personal and corporate tax rates were slashed, 
     providing new incentives for work and entrepreneurship. All 
     vestiges of wage, price and energy controls were eliminated, 
     freeing up markets to allocate resources efficiently.
       Industry deregulation begun by President Carter was 
     services, airlines and later telecommunications. Organized 
     labor excesses were curbed. Antitrust activism was shelved. 
     Free trade was expanded between the U.S. and Canada.
       The two biggest periods of the stock market's current 
     prosperity have been 1982-87, when the industrial average 
     moved up by roughly 219%, or 26.1% per year, and 1994 to the 
     present, as the average has gained another 172%, or 22.5% a 
     year. In between the market meandered, as Presidents Bush and 
     Clinton raised taxes and imposed regulations.
       But a steadfast Alan Greenspan brought the inflation rate 
     down to virtually zero today from roughly 5% at the beginning 
     of the 1990s. Along with bringing down interest rates, this 
     has sharply lowered the effective tax rate on capital gains 
     (which reflect inflation as well as real growth in the value 
     of assets) to about 30% from 80%, providing a tremendous 
     boost for the high-risk technology investment that has become 
     the engine of our new information economy. In effect, Mr. 
     Greenspan's disinflationary tax cut neutralized the Bush-
     Clinton tax hikes.
       The Republican Congress elected in 1994 put an end to the 
     high-tax and reregulatory policies of Mr. Clinton's first two 
     years. Mr. Clinton himself morphed into a middle-of-the-road 
     president who signed a capital gains tax-rate cut, welfare 
     reform, a balanced budget plan, the Mexican free-trade 
     agreement and other trade-expanding measures. All these 
     actions helped the stock market to soar
       Meanwhile, information technology took off. The capital 
     gains tax cut and low interest rates intensified 
     Schumpeterian gales of creative destruction. Low interest 
     rates create much more patient investment money. Low discount 
     rates also lead to high price-earnings multiples, something 
     the stock market understands even if its critics do not.
       The 1980s witnessed a technology surge, based mainly on 
     advanced computer chips, cellular telephones and personal 
     computers. In the 1990s all this was improved, but the big 
     push has come from innovative and user friendly software and 
     Internet commerce. Though the government's reports of gross 
     domestic product take little account of these developments, 
     the stock market knows full well how important these 
     technologies will be to future earnings, productivity, real 
     wages, growth and wealth creation.
       In fact, a significant gap has opened between the 
     performance of the Dow Jones Industrial Average, comprised 
     mainly of old-economy companies, and the new-economy Nasdaq. 
     Since 1990 the Nasdaq has outperformed the Dow by 271 
     percentage points. Over the past year, the Nasdaq has 
     increased 36%, while the Dow has gained only 16%.
       Amidst all the bull-market prosperity, another starting 
     development has occurred: the emergence of a new investor 
     class. Numerous surveys report that roughly half of all 
     Americans own at least $5,000 worth of stocks, bonds and 
     mutual funds. The investor class surely wishes to keep more 
     of what it earns in order to bolster savings that can be 
     invested in high-return stocks. This is why unlimited 
     universal individual retirement accounts may be the sleeper 
     tax issue of the next few years.
       Roth IRAs--which currently invest after-tax deposits that 
     will never be taxed again so long as the money is withdrawn 
     at retirement--could be expanded to include redirected Social 
     Security contributions and penalty-free withdrawals for 
     health care insurance, education, home buying and employment 
     emergencies.
       This might be the single most popular tax reform among the 
     shareholder class. By eliminating the double and triple 
     taxation of saving and investment, this approach opens a back 
     door to the flat tax, setting the stage for future tax cuts, 
     individual ownership of Social Security contributions and 
     other free-market policies.


                            Oversized Powers

       What a difference a century makes. The 1890s saw a painful 
     and costly depression that was principally caused by 
     government policies such as high tariffs and an inelastic 
     currency. Politicians reacted by discrediting free-market 
     economics; in its place, they moved toward a regime of 
     oversized government powers and diminished personal liberty--
     a movement that was interrupted only briefly in the 1920s.
       From Theodore Roosevelt's trustbusting to Wilson's tax 
     hikes, Hoover's tariffs, FDR's early entitlement programs, 
     all the way to LBJ's Great Society and Nixon's funding of it, 
     economic freedom suffered and prosperity was sporadic. The 
     century was filled with Keynesian nostrums that seldom 
     delivered the goods.
       The dominant event of the late 20th century is the bull-
     market prosperity of the 1980s and 1990s. This was caused 
     largely by a shift back to free-market economics, a reduction 
     in the role of the state and an expansion of personal 
     liberty. At the turn of a new century, taking the right road 
     will extend the long cycle of wealth creation and 
     technological advance for decades to come. By 2020 the Dow 
     index will reach 50000, and the 10000 benchmark will be 
     reduced to a small blip on a large screen.





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