What is it about the mainstream media?

What is it about the mainstream media and the American economy? Why are they always looking for slowdowns, soft patches, double dips or whatever? If anybody bothered to look under the headline 3.1 percent GDP report yesterday, they’d see that 1.5 percentage points were lopped off because of the $660 billion increase in real net imports. But that’s a sign of strength. Consumer and business activity is strong, that’s why they’re buying foreign goods.

If you put the import number back into GDP, you get a 4.5 percent quarterly gain. The same thing happened in the first quarter. The first estimate was 3.1 percent. It was below the 3.5 percent consensus. And the headlines screamed slowdown. But the final number came in at 3.8 percent, a much better picture.

So, history is repeating itself.

If the mainstream media wants to pick on lousy economies, why don’t they go after Western Europe or Japan, where growth is less than 1 percent.

Core private growth in the U.S. is actually over 5 percent in the past year. Today’s personal income report shows another big gain. Year-on-year, wages and salaries are rising nearly 6 percent. Entrepreneurial proprietors’ income is up 9 percent. And the core inflation rate is only 1.7 percent. Meanwhile, profits are rising at 19 percent in the first quarter, compared to a consensus estimate of only 10 percent.

Profits drive business. And business drives the economy. Which, by the way, is strong, not weak, with historically low interest rates.

I don’t know what the media has against the American economic machine. But once again, I’m here to report that the state of our low tax, low inflation, deregulated, high productivity, and technology-streamlined economy is quite healthy. And is likely to remain so for a good long period ahead.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Mark Bavoso, managing director of Morgan Stanley Investment Management, and Fred Dickson, chief market strategist at D.A. Davidson

-- U.S. Treasurer Anna Escobedo Cabral, on Social Security

-- General Alexander Haig, on the Bolton nomination

-- Bloggers Hugh Hewitt and Alex Tabarrok, on Bush's press conference and more

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Andy Kessler, Brian Wesbury of Griffin, Kubik, Stephens & Thompson, and Mike Holland of Holland and Company.

-- RBC Capital Markets' Jordan Rohan, on Internet stocks

-- Senator Jeff Bingaman, on energy

-- Senator Mitch McConnell, on judicial filibusters

Nuke 'Em

Senate Minority Leader Harry Reid doesn’t seem to get the fact that George W. Bush won the presidential election last November. He also doesn’t get that the Republicans picked up five seats in the Upper Chamber. That’s called a mandate. Despite this, Reid believes he can negotiate, or even dictate, which judicial appointments can be voted on in the Senate.

That’s utterly preposterous, and it’s one of the many reasons why Senate Majority Leader Bill Frist must put Reid and the rest of the filibustering Senate Democrats in their place once and for all. There is no political or constitutional reason why every presidential judicial nomination should not be voted on.

But it’s more than judges. The Democrats broader strategy is a plan to obstruct all of Bush’s reform agenda. That includes ANWAR and the energy bill, extending capital gains and dividend tax-cuts, a good asbestos bill, and free trade measures. It includes putting a hold on all Treasury nominations, the new EPA chief, and John Bolton’s UN nomination.

This must be stopped. It’s time for the Senate Republicans to go nuclear. It’s time for the president to implement the voter’s mandate for pro-growth policies at home and freedom and democracy abroad. The filibuster-happy Democrats should be nuked.

New NRO Column

Here's the full text of my new column on NRO. I don't understand why more pundits don't see that the Dems' obstructionist strategy is bigger than just the judiciary.


It’s More than Judges
The filibuster-happy Democrats have a grand scheme.

Senate Minority Leader Harry Reid doesn’t seem to get the fact that George W. Bush won the presidential election last November. He also doesn’t get that the Republicans picked up five seats in the Upper Chamber. That’s called a mandate. Despite this, Reid believes he can negotiate, or even dictate, which judicial appointments can be voted on in the Senate.

That’s utterly preposterous, and it’s one of the many reasons why Senate Majority Leader Bill Frist must put Reid and the rest of the filibustering Senate Democrats in their place once and for all.

There is no political or constitutional reason why every presidential judicial nomination should not be voted on. That includes nominees for the Supreme Court, the appellate courts, and on down the line. But the Senate Democrats are standing in the way of every nominee the president sends over, vowing to re-filibuster many that the president nominated in his first term.

But before we get into what can be done about this, let’s take a careful look at the Democrats’ broader strategy — which is a carefully constructed plan to obstruct and undermine the conservative’s post-election reform agenda for both foreign and domestic policy.

After blocking the judicial nominees, the Democrats will attempt to obstruct all pro-growth, pro-business legislation that makes it to the Senate. On the energy bill, they could attempt to filibuster any legislated drilling in the Arctic National Wildlife Refuge (ANWR). They could hold up the budget because they don’t want to extend the president’s tax cuts on capital gains and dividends. If a good asbestos bill comes around, they could obstruct that too. CAFTA and other free-trade opening measures could also be stopped.

It’s already more than judges. Democratic Sen. Max Baucus has a hold on all Treasury Department nominations, including one deputy secretary, two undersecretaries, and three assistant secretaries. One of these assistant positions oversees terrorist money flows. Why is Baucus doing this? Because he doesn’t agree with U.S. policy on Cuba. Instead of filling some important posts in an important government department, he’s aiding the Castro-Chavez axis.

Make no mistake about it: The Democratic strategy is to attempt to encroach on presidential authority in every single area. Why do you think John Bolton is having such a tough time being affirmed for the U.N.? Judges, Treasury, Bolton — they’re all linked.

There’s a way around this, of course. It’s called the “nuclear option,” and it’s been used before — by Senate Democrats.

In 1975, Sen. Robert Byrd of West Virginia introduced a bill that was co-sponsored by liberal Republicans Robert Griffin and Hugh Scott, along with old liberal Democratic warhorse, Mike Mansfield. The intent of this bill was to change the standing rules to permit “limitation of debate” (i.e., ending a filibuster) with a three-fifths vote of the whole Senate.

The Byrd resolution was postponed indefinitely. But in March 1975 a bill sponsored by then-Sen. Walter Mondale contained the same language as the Byrd bill, and it passed. Any change of the standing rules today is labeled the “nuclear option.” Back then a rule-change seemed only a small firecracker.

According to reports, Byrd also changed Senate precedents with simple up-or-down majority votes in 1977, 1979, 1980, and 1987. In other words, there is a clear history of rule-changing by the very same “nuclear option” that Byrd vehemently objects to today.

But once the bomb, or firecracker, goes off in the Senate, the air is going to clear. With an end to judicial filibusters, judges William Pryor, Priscilla Owens, Richard Griffin, Henry Saad, and Susan Neilson will all get a fair shot at being confirmed. The business community, which has been opposed to the nuclear option, will also enjoy the filibuster-free air. Senate Democrats, playing by the new rules, will have a much tougher time standing in the way of tort reform, energy reform, and quite possibly Social Security reform and tax reform.

While there is a precedent for changing the rules in the Senate, there is none for the type of obstructionism we’re seeing from the modern Democratic party. As Hugh Hewitt and Duane Patterson point out, there was exactly 1 judicial nominee filibustered on the Senate floor in the 20th century — the ethically challenged judge Abe Fortas. There have already been 10 such filibustered nominees in the 21st century, and we’re only 5 years in.

For Byrd, Reid, and the rest of the Democrats to protest that the Senate rules are inviolable, when it’s clear that all they have in mind is their own political advantage, is the height of hypocrisy.

It’s time for the Senate Republicans to go nuclear. It’s time for the president and the GOP to enjoy the mandate they earned in the voting booth last fall.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- a market segment with Ned Riley of Riley Asset Management, Dynamic Mutual Funds' Noah Blackstein, and Tom McManus of Bank of America Securities

-- Senator Kent Conrad of North Dakota, on Social Security and the budget

-- Senior Newsweek writer Charles Gasparino, on the NYSE and Kenneth Langone

-- a political panel with Steve Forbes, US News editor-in-chief Mort Zuckerman, and Powerline's John Hinderaker, on Social Security, Putin, filibusters, and the Bolton nomination

Grassley and Reform

The Senate Finance Committee began hearings today on social security reform. Regrettably, chairman Charles Grassley, a frequent guest and great friend of this show, has suggested a plan that would restore solvency, “with, or without, private accounts.”

Respectfully, I would suggest to Mr. Grassley, and to the White House, that you cannot solve the pending financial storm in social security without personal savings accounts.

The reason? The private account option would finance benefits through stock and bond market returns. Without private accounts, benefits will be funded only by higher tax payments from the government.

Higher taxes will stall the economy and benefits will suffer accordingly. But the thrift savings account model of benefits throws off a 6.7% yearly inflation-adjusted return, far superior to the 1.8% post-inflation estimate of future social security.

The market is more reliable over the long run than the government. As more and more people choose market benefits from private accounts, fewer and fewer will demand government benefits. Over 50 years, government benefits will shrink from lack of demand. And so will the unfunded future liabilities of the system.

Call it the substitution effect. Not until the White House or Congress moves to private accounts will social security insolvency ever be solved.

I would choose some combination of the Ryan-Sununu bill or the plan submitted by Senator Chuck Hagel. I would reject any and all benefit cuts or tax increases. And if we choose the private account path, the economy will prosper from a flood of new saving and investment, while people get more comfortable and safer retirement benefits.

In other words, choose economic freedom over government entitlement.

Tonight's Lineup

Tonight on Kudlow & Company, we have:

-- Susan Lyne, CEO of Martha Stewart Omnimedia

-- a market segment with Jason Trennert of ISI, the Maxim Group's Barry Ritholtz, and Barbara Marcin from Gabelli Asset Management

-- Senator Tom Coburn, on the budget and filibusters

-- CNBC's Ron Insana, on the Saudi oil situation

Leave the Yuan Alone

Last Friday I editorialized against a revaluation of the Chinese yuan. I disagreed with Fed chief Greenspan that it would do significant harm to their economy. Over the weekend, I found that the deputy chief executive of the Shanghai stock exchange, Mr. Fang Xinghai, believes, as I do, that the success of China's link to the U.S. dollar has played a key role in the country's strong growth and low inflation, both of which fluctuated wildly before the 1994 currency reform.

Mr. Fang notes that while China is running a tradable goods surplus, it is also running a trade deficit on service. Hence the overall current account surplus is only $15 billion or 1 percent of China's GDP. On this basis, the yuan is valued properly.

Fank also notes that the world has a de facto dollar standard. So it is in China's interest to keep its currency as stable as possible against the dollar in order to facilitate trade and capital flows.

Also weighing in, Stanford University's exchange rate expert, Ronald McKinnon, who also opposes China revaluation. He notes that China trade is mostly denominated in U.S. dollars, as was the case in Japan during the post World War II decades. He adds that a steady currency expedites trade flows to the benefit of all economies.

Let me also add that Congressional charges that China's currency must be changed or else a 27.5 percent U.S. tariff should be imposed is pure insanity. Senators Chuck Schumer of New York and Lindsey Graham of South Carolina must rethink this outlandish position.

In simple terms, that kind of huge tariff would impose an equally huge tax on both the American and Chinese economies and when you tax something big, you're going to get a lot less growth . . . to the detriment of both economies and their stock markets.

Leave the Yuan alone. That's good for growth and stocks. Just say no to currency and trade protectionism.

Tonight's Lineup

CNBC's "Kudlow & Company" for Monday, April 25:


Ben Stein, Frank Gannon (AIG Sun America), and Brian Rogers (T. Rowe Price) will discuss the markets.

Wayne Angell, former Fed board member and president of Angell Economics, will talk about Fed tightening, commodities, and China trade.

Sen. Pete Domenici will give us an update on energy.

Tom Brown will talk bank stocks.

Mr. Greenspan, If It Ain't Broke . . .

Fed chairman Alan Greenspan said that China will unpeg its currency from the dollar sooner rather than later because China's currency, "is beginning to significantly work to the detriment of the Chinese economy."

With all due respect to the Maestro, I want to suggest that his view is significantly wrong.

Since China pegged its yuan to the dollar in 1994, their economy has grown by 8.6 percent a year -- inflation-adjusted -- with only a 3.1 percent inflation rate. I'd say that's pretty darn good.

In the past year China has grown by 9.5 percent with only 2.7 percent inflation, which by the way has come down from over 5 percent. I'd say that's pretty good. And the stable yuan has attracted billions of dollars of foreign investment, which has helped the market liberalizing Chinese economic policies.

Currency instability is a terrible idea. So is currency manipulation. A much higher yuan will significantly depress economic growth in both China and the U.S.

As for trade, the best thing the U.S. could do is slash business taxes here at home to make us more competitive abroad.

But all forms of currency or trade protectionism will damage prosperity and undercut foreign relations. China has a lot of work to do on democratization, religious freedom, and market reforms. But destabilizing their succesful economy by destabilizing their currency is a truly bad idea.

You know, Mr. Greenspan, there's an old saying: If it ain't broke, don't fix it.

Wayne Angell is Right

Wayne Angell is almost certainly right that the Fed is tighter than almost everybody thinks. I have been making the same point by adjusting for the deflation/reflation roundtrip of gold and commodities since 1996. At current levels gold and spot commodities are within a few percentage points of where they were in 1993-1995, a period of roughly 2 percent inflation. Today’s gold at $434 is consistent with the 2 percent inflation zone. Gold’s failure to break out of the trading range shows the success of the Fed’s money-tightening policy. And gold stock indexes are about 20 percent below their recent peak of last November.

Wayne Angell uses his own commodity basket to illustrate that the monetary reflation of 2002 to 2004 has come to an end. He applauds the Fed’s money management policies and the recent shift to greater scarcity of money, but warns “but do not chase this billy goat all the way to Japan.” In other words there’s no need for a 4 percent to 5 percent target rate. 3 percent may well be a neutral fed funds rate.

Let me add some thoughts that I believe Wayne Angell, an old friend and mentor, would agree with. First, the stock market is worried that Greenspan & Company will over-tighten as they attempt to puncture the so-called housing bubble and limit economic growth. These are poor policy targets. But I fear that instead of using an inflation-sensitive price rule, the Fed could repeat its deflationary mistakes of 2000-2001.

Another potential economic growth and stock market problem is the threat of protectionist currency and trade war with China. Protectionism is an anti-growth tax hike that would be lose-lose for China and the U.S. Since the yuan peg in 1994, China’s average yearly real GDP growth is 8.6 percent, with only 3.1 percent inflation. So when Alan Greenspan told the Senate Budget Committee yesterday that China’s peg “is beginning to significantly work to the detriment of the China economy”, I don’t know what he is talking about.

Loosening or eliminating the dollar peg will create currency instability, perhaps with an over-revaluation that could lead later on to a yuan-sinking depreciation as foreign capital withdraws and their economy sinks. In the short run, a significant yuan revaluation could sink world commodity prices, which, as Wayne Angell points out, are already weakening. The U.S. textile lobby and other special interests think they want a more expensive yuan, but they are too short-sighted in realizing the detrimental economic effects on the macro economy of both the U.S. and China.

Free trade and steady money will prolong the global economic boom, but currency manipulation, trade barriers, and Fed over-tightening will end it. The recent rise in stock market volatility shows just how uncertain investors have become regarding policy moves on trade and money.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- a market segment, with Chip Dixon of Lehman Brothers Global Equity Research, and James Glassman of the American Enterprise Institute

-- the Financial Times' Richard Waters, on Internet stocks

-- Barbara Ryan, of Deutsche Bank, on pharmaceuticals

-- bloggers Austin Bay and Roger L. Simon, and the Wall Street Journal's Claudia Rosett, on Kofi, Bolton, the Volcker Report, and the UN

The Clarida Candidacy

The Washington buzz is that former Treasury official Richard Clarida is on the short list for the Federal Reserve Board seat vacated by Ben Bernanke, who has gone over to be President Bush’s chief economist at the CEA.

So I want to strongly endorse the Clarida candidacy for the Fed. I’ve known him for years and he’s a good man. A graduate of the University of Illinois with a Ph.D. from Harvard. He is currently teaching economics at Columbia. And earlier he was chairman of that department. Before that he taught at Yale. He has published numerous articles in leading academic journals. He is also a Wall Street consultant.

On the Fed, Clarida would push for sound, non-inflationary monetary policy. He is also a strong supporter of the President’s tax rate reduction on capital investment.

Importantly, he does not believe that strong economic growth and more people working causes inflation. That’s very good.

Mr. Clarida grew up in downstate Illinois, 90 miles from St. Louis. He is a lifelong St. Louis Cardinals baseball fan. This will qualify him to represent the St. Louis Federal Reserve district, which is currently not represented at the Board in Washington.

So once again, let me strongly endorse Richard Clarida for the Federal Reserve Board.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- Former senator John Breaux, on tax reform

-- Senator Norman Coleman, on why Kofi must go, and John Bolton

-- American Petroleum Institute president Red Cavaney

-- a market segment on the rising bull market with Michael Murphy of Technology Investing Online and Bob Smith of T. Rowe Price

Correction

Someone caught our error in yesterday's post, Byrd Brain. Good job. 56 is roughly 67% of 83. The vote does accord with the Byrd amendment itself. We were wrong. The Democrats are not guilty of that particular hyprocrisy.

But that claim was incidental to the main thrust of the the argument. The Democrats changed the rules in the face of a desperate legislative situation -- and who can deny the claim that, with such a vast increase in the number of judical filibusters, the Republicans are facing something simliar?

And as Gupta and Gold note (the article is available here-- check towards the end) Byrd changed the allegedly sacrosanct rules by setting new precedents four times over a period of ten years, without altering the text of rules. This amounts to the same thing as changing the rules themseleves. Why should the Republicans be denied the right to do what the Democrats did?

Byrd Brain

The historic political debate over the Senate filibuster may come to a head in the next week or two. Opponents of filibuster reform say that the Founders intended the Senate rules to be sacrosanct, and that any amendment to the rules requires a two-thirds majority in principle. But how else, say beleaguered Republicans, will our judicial nominees get a fair hearing? And what about all the changes to Senate procedure that took place in the late 70’s and early 80? Let’s look at history, and see what it tells us.

In spite of the alleged sacrosanctity of the Senate’s Standing Rules, in 1975, Senator Robert Byrd of West Virginia introduced a bill on the floor of the Senate, Senate Resolution 93, co-sponsored by Sen. Robert Griffin and Sen. Hugh Scott, two liberal Republicans, and the old liberal Democratic warhorse Sen. Mike Mansfield. The intent of this bill was to

Amend the Standing Rules of the Senate to allow limitation of debate on matters other than an amendment of the rules by a 3/5 vote of the Senate, and to allow limitation of debate on an amendment to Rules by a 2/3 vote of a quorum.

Resolution 93 was postponed indefinitely, but in March of 1975 a bill sponsored by Sen. Walter Mondale, Senate Resolution 4, passed, in a straight up-or-down56-27 vote. This bill included the provisions of Byrd’s Res. 93 to amend Rule XXII of the Standing Rules – the rule that provides for unlimited debate in the Senate, allowing potentially endless filibustering.

So let me get this straight: Resolution 4 (the Byrd Amendment, as it’s sometimes called) lowers the requirements to end a filibuster from a 2/3 majority to a 3/5 majority. OK.

It also says that on all matters pertaining to change of the Standing Rules, the previous 2/3 majority (although it asks merely for a majority of quorum, not a straight 67 member supermajority) is still necessary to end a filibuster. Some would argue that this proves that the Standing Rules are so important that they must never be altered except by a 2/3 majority. Fair enough.

But then why was this change to the Rules passed with only a 56-27 majority, which is not even a 2/3 majority of quorum? It’s only 60% -- also known as 3/5.

Last night, on Kudlow and Company, Nancy Zirkin, of the Leadership Conference on Civil Rights, claimed that

Those rules [the Standing Rules] have been changed from time to time, following the rules, not breaking the rules. In other words, it takes 2/3rds to actually change the rule. If that's what the Republicans want to do, that's how they ought to do it. There have been times when folks have tried to change the rules without the required 2/3rds, but it has never really happened.

But Byrd (and Griffin, Scott, Mansfield, and Mondale) changed the rules without a 2/3 majority, in a straight up-or-down vote, at which 93 senators voted. These rule-changers couldn’t even muster 2/3 of them. But 3/5 is enough, apparently, to change the rules – when Democrats or liberal Republicans are arguing for the changes. Hypocritical, no?

The Democrats have only themselves to blame. As Hugh Hewitt and Duane Patterson point out, there was exactly one judicial nominee filibustered on the Senate floor in the entire twentieth century –the ethically challenged judge Abe Fortas. There have been 10 such filibustered nominees in the twenty-first century to date—and we’re only 5 years in. At this rate, the Dems will have filibustered 200 judicial nominees by century’s end.

What’s more, Dems appear more than willing to filibuster Republican priorities on tax cuts, Social Security, and energy, to name a few. With this in mind, can anyone blame the Republicans for wanting to reform the Standing Rules, after such flagrant abuses? After all, they’d only be continuing the work begun by Byrd and Mondale thirty years ago.

Robert Byrd has written a long history of Senate rules and procedures, so maybe he can clear up this contradictory behavior. After all, he changed Senate precedents without a 2/3 majority in 1977, 1979, 1980, and 1987, according to an article Martin Gold and Dimple Gupta of the Harvard Journal of Law and Public Policy cited in a Wall Street Journal editorial, which makes him an expert on the flexibility of the Senate’s rules. But for Byrd and the rest of the Dems to protest that the Standing Rules need a supermajority to be changed is the height of hypocrisy.

Tonight's Lineup

Tonight, following a special half-hour interview with President George W. Bush conducted by Ron Insana, we have Ron, Amity Shlaes of the Financial Times, and Political Diary's John Fund as a discussion panel. Enjoy.

New NRO Column

Check out my new NRO column:

The China Mess
What are we thinking?

Read the rest here.

Tonight's Lineup

Tonight on Kudlow & Company, we have:

-- a market sgement with CBS Marketwatch's Herb Greenberg, Garzarelli Research's Elaine Garzarelli, and Jeremy Siegel of the Wharton School of Business

-- Eric Ross, of Think Equity, on Intel, and Jack Kelly, of Goldman Sachs, on 3M

-- Blogger Hugh Hewitt of HughHewitt.com and Nancy Zirkin of the Leadership Conference on Civil Rights, on filibusters

-- The Heritage Foundation's Peter Brookes, on China, Japan, the UN, and John Bolton

China Card

There’s a lot of political and economic bad blood developing between China and Japan and China and the US. A rash of anti-Japanese demonstrations has broken out with a nod and wink from Chinese authorities in Shanghai and Hong Kong.

The Chinese want Japan to keep apologizing for aggression in the 1930’s and 1940’s, though Japan has done so about 40 times in recent years. The Chinese also claim not to like Japan’s newly revised history textbooks on the subject. Then there’s the ongoing squabble about oil and gas reserves in some offshore islands.

But the problems here run much deeper. China doesn’t much like the fact that Japanese Prime Minister Koizumi is pulling his country even closer to the US in the world terror war. This renewed US-Japan alliance also implies protecting a free and democratic Taiwan against Beijing’s new “anti-secession” law.

Also Japan is joining the US in efforts to stop North Korea’s military and nuclear buildup. China says it will help, but it never seems to help much. China dominates North Korea, so it could really put the pressure on Kim Jong Il to renegotiate a nuclear agreement. But China never seem to really put the pressure on, do they?

This is also the country that praised the late Pope John Paul II upon his passing, but then promptly jailed a Catholic bishop and a priest. Despite regular denials, the Communist regime continues its religious persecution.

Meanwhile, Japan, the US, and the Rest of the G-7 are putting the heat on China to up-value or revalue the Chinese yuan and end its peg to the US dollar. Allegedly, this is to stop “cheap” Chinese exports from flooding US and European markets, and correcting global trade imbalances. But any meaningful currency adjustment would have to be at least a 25% yuan revaluation. That would require meaningful tightening of Chinese monetary policy, which, in turn, would cause a big slowdown in Chinese economic growth.

That G-7 threat, by the way, could be a key if unnoticed factor in the US stock market selloff. A much slower China economy would take a percentage point or more off US economic growth, especially in areas like commodities and raw materials, cyclical industries, tech, and transportation, shipping, and trucking. These are exactly the market sectors that have been getting hammered the most in the recent stock meltdown.

Does the US really want a big increase in the Chinese currency that might result in a sizeable slowdown in the economy? Asian currency instability led to world deflation in the mid-1990’s, when several Asian tiger currencies de-linked from the US dollar. It was a big mistake then, and it could be a big mistake now. Treasury man John Snow wants flexible and floating exchange rates worldwide, including China.

But currency fine-tuning could damage the world boom. In recent decades, the IMF should have learned that emerging-country currencies don’t float, they sink. China has a shaky banking system plagued with bad state-sponsored loans to failing nationalized companies. A newly-floating yuan might rise in the short run, but then could turn around and crash in the medium term as foreign investors withdraw their capital flows for fear of instability. Anyway, the Chinese don’t like to be pushed around by the West in any area, be it diplomacy or economics.

Protectionist pressure on the Chinese is also rising. A trade-opening textile agreement has resulted in a temporary burst of Chinese clothing exports to the US. Though American clothing makers have known this was coming for years, they are now suing the US government for relief on so-called “anti-dumping” grounds, under the Byrd amendment, which is a troublesome protectionist tool that should have been repealed years ago. The Chinese government is accusing the US of reneging on the free-trade textile deal, and they are right on this one.

Protectionism not only blunts economic growth, it also sours international political relations. Currency protectionism is just as bad as trade protectionism, and at the moment the US is aiming both at China. Add that to the vexing North Korean nuclear proliferation problem and historic ill-feelings between China and Japan, and you’ve got a real geopolitical and economic mess brewing in northeast Asia.

It is no wonder that China doesn’t want Japan to be admitted to the UN Security Council, though they would apparently support India, Germany, and Brazil. Nor should it be any wonder that a Chinese military buildup, including their navy, is in high gear. Whether Europe sells arms-related technology to China is beside the point. The Chinese have accumulated such a huge hoard of foreign-exchange reserves from their massive dollar, yen, and euro holdings, that they can buy defense and communications technologies on the world’s open markets either legally or illegally.

Without question, a new round of clear-eyed and hard-headed diplomacy with China on terror war, Japan, and economic-related issues is vital. But the US presently seems more focused on Lebanon and the Middle East as well as the John Bolton nomination to the UN. So at the moment a strong China card, or a clear China policy, has not yet been found.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- The Wall Street Journal's Tom Herman, on last-minute, legal ways to skirt the IRS

-- a market segment with Andy Kessler, columnist for the Wall Street Journal

-- Dr. Art Laffer, chairman of Laffer Associates, on the flat tax

-- Rep. John Linder of Georgia, on the fair tax

-- Bloggers Austin Bay, Roger L. Simon, and Wonkette, on John Bolton and the UN

Scrap the Tax Code!

Today is April 15th tax day and all week long the stock market has been plunging. I wonder if there is a relationship.

Are people selling stocks to pay their tax bills? According to a recent Harris poll, 55 percent of Americans believe taxes are too high. Only 33 percent believe they are about right.

What should folks pay for federal, state, and local taxes? 41 percent think 10 percent to 19 percent should be the maximum percentage. 23 percent think the top tax rate should be 20 percent to 29 percent. And another 20 percent think only 1 percent to 9 percent. That means 61 percent believe they should pay less than they do now.

Meanwhile, 77 percent think the federal tax system should be completely overhauled or needs major changes. What kind of changes? 33 percent prefer a flat rate income tax with no deductions. 19 percent favor a national sales tax. Would folks be willing to give up some deductions for a simpler tax system? 54 percent say yes. Should everyone pay the same tax-rate? 54 percent say yes.

Last year 44 million Americans -- that’s one third of all taxpayers paid no federal income tax after deductions and credits. But, according to the Harris poll, 59 percent believe everyone should pay some tax to the government.

As for me, I would scrap the present code and replace it with a flat tax system where tax forms would be no larger than a 5x8” index card. All income should be taxed at one low rate, preferably no higher than 20 percent. Saving, investment, capital gains, dividends, estates, and corporate investment shouldn’t be taxed at all. This simple, honest, fair, and flat tax code would spur growth, jobs, and wealth creation for all Americans.

Recovery Intact

Please allow me to express my skepticism over the likelihood of a significant inflation breakout to the upside.

Using market price signals to gauge inflation pressures, the level of gold and spot commodities still look consistent with roughly 2 percent inflation or thereabouts.

The following charts adjust for both deflation and reflation trends for gold and the CRB spot. When you remove the deflation-reflation round trip which covers roughly 1997 through 2004, we are basically left with the 1995-1996 average commodity levels that were consistent with about 2 percent inflation.




An updated version of our golden cone shows the same effect. More or less, a $425 gold price is fine. $500 or more would be a worrisome signal for inflation, just as gold dropping under $350 might suggest a new round of deflation.

Major monetary turbulence is a prosperity killer. But a positive-sloping yield curve alongside $425 gold is not recessionary turbulence. So all the talk this morning about a significant economic slowdown is just that -- talk.

The broadest and most accurate inflation indexes reported by the government are still mild. Rather than the CPI, take a look at the chain-weighted or Boskin CPI that has stronger substitution effects in response to individual prices bobbing up and down (like chicken vs. meat).

Including oil, the Boskin CPI has increased 2.6 percent over the past year, but the core version has gained only 2.0 percent. For Greenspan’s favorite personal spending deflator, the core rate is only 1.6 percent compared to an overall reading of 2.3 percent.

But all these inflation markers are quite tame. As noted earlier, the leading price signals are also tame.

As for other measures of economic activity, frankly they look pretty good. Using seasonally-adjusted six-month measurement periods to capture both short and longer term trends, there are no recession signals.

Even core retail sales are growing at a 7.3 percent pace, only slightly less than their peak rate in the middle of 2003. Total wage and salary growth is 4.7 percent, and when adjusted for inflation and taxes is 3.6 percent. Proprietor’s income, which reflects the most entrepreneurial business development, is near 10 percent. Its peak was about 12 percent in the middle of ’03.




The strongest indicator is core factory shipments that reflect developments in business investment spending for capital goods. This measure is rising at a 13.4 percent pace.

There may be a slowdown coming in business profits, though at the end of 2004 the after-tax profit share of GDP was 8 percent, a new record high. Pre-tax profits absorbed 10.2 percent of GDP, nearly a record high. These are IRS-reported profits from the national income accounts. They are $456 billion above their recessionary trough, an 88 percent recovery. The S&P 500 stock index has risen 50 percent since its trough. So on that basis shares are still undervalued.




There has been a slowdown in total business sales, which are currently rising at a 6.9 percent rate compared to about a 15 percent peak roughly a year ago. Since unit labor costs are still below unit prices, profit margins remain positive. But the slower sales pace suggests that corporate earnings this year will rise by nearly 10 percent compared to last year’s 16 percent gain.

As far as any slowdown is concerned, I would suggest that real GDP growth is simply moving toward its long-run trend of 3.5 percent. Add on a 2 percent inflation increase, or possibly slightly higher, and money GDP growth looks to be in a 5.5 percent to 6.0 percent zone. Coupled with a 10 percent profits gain, this would constitute a very good economic year.

Sensitive market price indicators such as the positively-sloped Treasury yield curve and relatively narrow credit spreads for both investment grade and high yield corporate bonds suggests no recession in sight. When those credit spreads widen significantly, and the yield curve inverts, recession and a big stock market decline will likely follow. But right now the recessionary bear has not reappeared.

The following stock market chart shows that the bull trend is still intact despite a choppy 2005 performance. Important growth-sensitive sectors such as commodity stocks, transportation, retail, and industrials are still trading near their all-time highs. Also, the small cap S&P 600 index is still beating the large cap 500 index. This is another sign of economic growth.

Besides major monetary turbulence, the other great prosperity killer is rising marginal tax-rates. But tax-rates have come down in recent years, and the new budget resolution in Congress will extend the 15 percent tax-rate on cap gains and dividends another two years out to 2010. This is good. The estate tax may be lowered to 15 percent, with a $10 million exemption for single filers and a $20 million exemption for married filing jointly. This is also good.

As long as there are ample incentives to put more capital into capitalism, the economy will prosper. And who knows, the Connie Mack/John Breaux tax reform commission may come up with some solid pro-growth ideas, including unlimited Roth IRA-type savings accounts. This would really put more capital into our free market economy.

Right now the biggest threats to prosperity are trade protectionism and government overspending. At the moment they seem to be minor threats, but both bear close watching.

The bottom line to the economic outlook is that a combination of supply-side tax cuts and a mildly accommodative monetary policy are pro-growth. The strongest economic sector is business investment, a rock solid foundation for continued recovery. Both inflation and unemployment are historically low. Interest rates are normalizing, but they too remain historically low. Productivity and profits are well above their long-term trends. Economic policies are never perfect, but on balance they too are pro-growth.

Three years after the terrorist bombings and the bear market economic downturn, U.S. economic and defense security continues its impressive recovery trend. That’s the real bottom line.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- Treasury Secretary John Snow, on the budget

-- a market segment with Mike Holland, from Holland and Company, and James Smith, of UNC's Kenan Business School

-- Alan Reynolds, on the Alternative Minimum Tax

-- The Right Wing, with former Delaware Governor Pete du Pont, the Wall Street Journal's Kim Strassel, and Political Diary's John Fund

Comments Help

Wow. Especially after the past two days, I have to say I'm impressed by the volume and (for the most part) seriousness of the comments. A suggestion: if you are going to include a link in your comments, please do not transcribe it in its entirety, as extremely long links can mess up the formatting of the page. Instead of simply cutting and pasting try using Blogger's handy HTML tags, which work even when used in comments. A link to how they work may be found here.

Rescind the Budget

The just-released March Treasury statement on the U.S. budget is bad news for the Bush administration. According to my calculations the FY 2005 budget deficit is on track to come in at $460 billion, or 3.8 percent of projected GDP, compared to the FY 2004 deficit of $427 billion, which was 3.5 percent of GDP.

The culprit, as usual, is overspending. Total budget outlays are trending at a 7.1 percent rate, compared to 6.2 percent last year. In particular, it is non-defense, non-security discretionary spending that is breaking the budget plan by rising 6.5 percent year-to-date compared to the Bush OMB targeted estimate of 1 percent.

If this measure of non-entitlement spending had been held to the 1 percent policy, then the full year total would be $651 billion. Instead, the domestic non-security discretionary budget is on track to come in at $686 billion, a $35 billion overshoot.

Noteworthy is the fact that tax collections are more than holding up their share of the deal. At lower tax-rates implemented in mid-2003, solid economic growth is throwing off a 10.4 percent year-to-date increase in revenues compared to the prior year. Income tax collections are rising 8.5 percent. Corporate tax receipts are flooding in at a 48.3 percent pace. Importantly, non-withheld tax receipts, which include dividends and capital gains, are rising at a 9.1 percent pace. The Laffer curve is working.

In order to meet their budget goal, the President must rescind $35 billion of appropriated outlays. This would amount to 5 percent of total non-security discretionary spending. It’s not a huge cut. But if the White House is to rebuild confidence in its own budget management, and hold tax-rates down, it must make these cuts. The sooner the better.

Juvenile Democrats

The Democrats on the Senate Foreign Relations Committee are hitting a new low in their unseemly attacks on UN ambassador nominee John Bolton. Especially Senator Barbara Boxer, who insists on nitpicking Bolton over his personal relations with State Department staff. This is school kid stuff, not for adults supposedly dealing with American foreign policy in the ongoing terror war.

In some sense Joe Biden is even guiltier of juvenile behavior since he knows better and is usually a very serious player. Biden’s “warmonger” description of Bolton has been playing on Iran state radio, I learned last night while co-hosting the John Batchelor Radio Show. A normally serious guy like Biden should know better than to hand our enemies this kind of false ammunition, as though the whole world weren’t watching the Senate hearings. But the whole world is watching. As it should, since American decisions reverberate everywhere. I notice that the much-ballyhooed Senator Obama and the old liberal warhorse Senator Christopher Dodd (who used to defend the Ortega brothers in Nicaragua) have followed the Boxer-Biden line.

What is utterly astonishing is the failure of the Democrats to even discuss the scandal-ridden Kofi Annan regime at the UN. Not just oil-for-food, which is bad enough, but also the sexual misconduct charges, the institutional corruption, and of course the ultimate issue which is the disproportionate power held by totalitarian states under current UN rules. The UN should be run by democracies, not terrorist dictatorships. What is more, so far I haven’t heard any Democrats acknowledge that it was John Bolton as a State Department official who succeeded in overturning the anti-Israel zionism is racism resolution that stood for so many years. Bolton did this. An incredible accomplishment. Where are the Democrats on this issue now as they attempt to derail Bolton’s bid?

Cleaning up and reforming the United Nations is the issue. Until the UN is successfully reformed, and Kofi is gone, American support for the organization will not be restored. It so happens that John Bolton is exactly the guy who can push reforms across-the-board. For those of us who believe a new UN with new leadership can be a force for good in world affairs, reformer Bolton is exactly the right kind of appointment. As a strong supporter of President Bush’s vision of spreading freedom and democracy worldwide, both for its own sake and to defeat radical Islamist totalitarianism, Bolton would be an ideal UN ambassador. Very much in the mold of the late Pat Moynihan or Jeane Kirkpatrick.

Finally, on the point about questioning intelligence analysts, haven’t the various intelligence investigations proven conclusively that the intelligence community simply cannot be trusted? Groupthink, not hard facts, surfaces and resurfaces in these investigations, most notably in the most recent Silberman-Robb Commission, which tackled the confounding misinformation campaign from “curveball”, the notoriously misleading source (who was not Ahmed Chalabi). If anything, John Bolton, Colin Powell, Dick Cheney, and other senior policy types should have asked more, not fewer, questions about intelligence-related declarations.

Tonight's Lineup

CNBC's "Kudlow & Company" April 13 lineup:


Tom Herman from the Wall Street Journal on legal ways to skirt the IRS

Reporter Mary Thompson and Newsweek's Charlie Gasparino will give us the latest on Hank Greenberg and AIG

Connie Mack on scrape the code tax reform

Budget hawk Congressman Mike Pense

David Goldman from Banc of America on outlook for bondland

Malcolm Hoenlein to discuss John Bolton's UN nomination and Ariel Sharon at the Crawford ranch.

Tonight's Lineup

On CNBC's "Kudlow & Company"


Scott Hodge, president of the Tax Foundation

Charlie Gasparino, senior writer for Newsweek re: AIG

Mike Holland, Holland & Co. re: market

Senator George Allen re: Internet taxes

Robert Reich and Don Luskin re: the Fed

Ernest Christian re: taxes

Tax Week

It's tax week, with April 15 just a few days away. And as you know, Kudlow & Company stands for tax freedom.

I strongly believe that lower tax rates produce more economic growth whereas higher tax rates stifle growth and punish success.

As this week unfolds, we're going to cover a number of tax topics, starting tonight with ways to legally outflank the IRS so that you the taxpayer/investor can keep more of each dollar earned. Also tonight, we'll debate a proposed U.S. value-added tax.

Later in the week, we'll look at prospects for a national sales tax, and we'll review the progress of the President's tax reform commission.

Taxes are the principal way the U.S. government regulates the economy. Money and inflation are the Fed's pervue, but tax regulation is the center of fiscal policy. As a supply-sider, I want flatter rates, a broader base, and the simplest tax system possible. Ideally, income should be taxed only once. Investment capital shouldn't be taxed at all. This would enable you to keep and invest more of what you earn. And that's pro-growth.

The U.S. Tax Code is thousands of pages, in teeny tiny type, and the wording is exactly as the title suggests -- it's code! It's anti-taxpayer and anti-growth. Scrap the tax code. Throw it into the dustbin of history.

Estate Tax Relief

Good news in a Wall Street Journal story today describing a potential compromise bill for permanent estate tax relief. Republican senator Jon Kyl and Democratic senator Chuck Schumer are looking at a plan that would exempt $10 million a person, and $20 million a couple, and then impose a 15% tax rate on the remaining estates.

Remember, estates suffer heavily from multiple tax penalites. Folks are first taxed on their income earned from working. They're taxed a second time on capital gains. Possibly a third time on dividends. Perhaps a fourth time on corporate taxes. And then a fifth time on their estates.

These multiple taxes reduce saving, investment, and capital formation, all of which form the seed corn for business, investment, job creation, and economic growth. In a perfect world, it would be better not to tax estates at all. But a political compromise that taxes capital gains, dividends, and the so-called death tax at the same 15% rate would be a huge improvement. Ideally, income should only be taxed once, either through a flat tax or a national sales tax.

But I think that this brewing compromise would be pro-growth and pro-saving. You know what? It would put some more capital into capitalism.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- Tracy Mullen, of the National Retail Federation

-- a market segment with Bob Froehlich and Craig Russell

-- Farid Ghadry, president of the Reform Party of Syria

-- David Boies, on Hank Greenberg

-- Ana Marie Cox of Wonkette and Best of the Web's James Taranto

Peretz Gets It Right

Check out Martin Peretz's typically incisive essay on Bush and the Democratic Party, "The Politics of Churlishness."

Tonight's Lineup

Tonight on Kudlow & Company, we have:

-- Senator Ben Nelson, on Social Security, the nuclear option, John Bolton, and Iraq

-- Political strategist and publisher Mary Matalin

-- a market segment, with Brian Rogers of T. Rowe Price and Mike Holland of Holland and Co.

-- The Right Wing, with National Review's Byron York, Human Events' Terence Jeffrey, and The Capital Gang's Margaret Carlson

-- James Cramer, on his new book Real Money

Leave SPRO Alone For Now

The Bush administration refuses to sell oil from the Strategic Petroleum Reserve Fund, and prefers to hoard these reserves for national security during wartime. Okay. Fine. But they face a pending decision to fill SPRO by another 27 million barrels, which would bring the reserve to 727 million.

Please don't do it. This is the wrong time. We're already in an oil bubble, despite the fact that inventories keep rising and year-to-date we have the biggest inventory build in the past 25 years, according to Bear Stearns. Rising prices and inventories don't make any real sense. More bubble evidence: from the lows, oil is up 220 percent. Compare that to gold, which is up 64 percent, or spot metals, up 117 percent. Oil is way out of line. It's an Internet-type speculative bubble. Mutual funds, hedge funds, and even insurance companies are buying oil on the momentum trade. This could be dangerous.

Goldman Sachs' $105 forecast is also right out of the Internet bubble period. This bubble will burst before long and prices will return to normal. But the White House could help by leaving SPRO alone for now. Their reserves are full up enough. Leave it be and let markets find a more normal oil price level. Motorists and the economy will benefit.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- Senator John Cornyn, on asbestos legislation

-- Former governor John Engler, of the National Association of Manufacturers

-- Christopher Byron, Micheline Maynard, and Maryanne Keller on the problems with General Motors

-- George Scalise, of the Semiconductor Industry Association

-- a market segment with Eric Ross of Think Equity and John Bollinger of Bollinger Capital Managment

New NRO Column

I have a new column up at National Review Online:

Evidence, Evidence, and More Evidence
Lower tax rates spur economic growth. End of story.

Reade the whole thing here.

Respectfully Disagree, Part II

Last night I respectfully disagreed with a New York Times article arguing that there’s no evidence that lower tax rates produce higher economic growth. I gave numerous examples of academic work as well as papers from the OECD, the IMF, and the CBO. All showed a strong correlation between lower taxes and higher growth.

Let me briefly add some 20th century economic history.

The Harding-Coolidge-Mellon post-World War I tax cuts led to the roaring 20’s. But the Herbert Hoover-Franklin Roosevelt tax increases led to and prolonged the depression of 1930’s. John F. Kennedy cut taxes to keep his promise of getting the economy moving. And it led to the boom of the 1960’s.

Ronald Reagan’s deep tax cut revolution rescued us from stagflation and created the booming 80’s. No amount of econometric finagling can erase this history.

So to the New York Times again I respectfully disagree.

Tonight's Lineup

Tonight, on Kudlow & Company, we have:

-- Bill Miller, president of the US Chamber of Commerce, on the business agenda in Washington

-- Senator Norm Coleman, who will repeat his call for Kofi Annan's resignation

-- Analyst Brian Tunica, of JP Morgan: retail stocks are hot

-- a market segment with Liz Anne Sonders of Charles Schwab and Stuart Freeman of AG Edwards: Is the correction over?

-- Charles Gasparino, on Dick Grasso and AIG's Hank Greenberg

Respectfully Disagree

A recent Sunday New York Times opinion piece by reporter Anna Bernasek argues that there's no real evidence that lower tax-rates spur economic growth. She cites a couple of economists who purport to have done this research. So let me beg to differ in a very significant way.

First, I will cite the work of Harvard economists Martin Feldstein and Greg Mankiw, along with numerous articles published by the National Bureau of Economic Research. Then there's the work of Columbia economist Glenn Hubbard and Princeton economist Harvey Rosen. All show a high correlation between lower tax-rates and higher economic growth.

Then there's the Nobel prize-winning Edward Prescott of Arizona State and Robert Mundell of Columbia. Some will respond that these are Republican advisors.

There's also work from the Paris-based OECD, the IMF, and the Congressional Budget Office.

Then there's the real world evidence. Both the Reagan tax cuts and the George W. Bush tax cuts triggered economic growth. President Clinton raised taxes in his first term, but lowered them in his second term, contributing to a burst of investment and growth.

Russia and almost all the former Soviet bloc countries in East Europe are moving to low flat tax-rate systems. Mrs. Thatcher's tax cuts made Britain the strongest European Union economy, that is until Ireland replaced it with even lower tax-rates.

Years ago, Art Laffer and Victor Canto showed that low tax states in the U.S. badly outperformed high tax states. I will have more to say on this in future days, but for now, I wish to respectfully but forcefully disagree with Ms. Bernasek.

The Next Generation

Yale senior Jonathan Swanson and Haverford senior Patrick Wetherille have founded a student group, Students for Saving Social Security, dedicated to grassroots agitation for social security reform. Check out ther website here -- and sign the petition.

Money

Since the Fed started restraining its liquidity and interest rate policies in June of 2004, money supply measures have been slowing markedly. Using 6-month measurement intervals, the monetary base has come down to 3.8% annually from 7%. Narrow transaction money M1 has slowed from around 6% to 2.5% recently. Another transaction measure, MZM, hasn’t moved since last September, and over the past 6 months stands at 0.7% annually.

Is the central bank looking at this? Chicago Fed president Michael Moskow told me on Squawk Box last Friday morning that inflation trends can be divined by looking at the “slack” in the economy, sometimes referred to as the “output gap.” This is the difference between actual and potential GDP, a number whose technical underpinnings have been called into serious question for decades.

But I thought inflation was primarily a monetary phenomenon. Over the past 12 months, the core personal spending deflator registered a tepid 1.6% increase. This seems more in line with the sinking money numbers. In the Laffer model, inflation is caused by excess money when base growth exceeds M1 growth. In other words, the Fed is creating more dollars than the market demands. On this basis there is a slight excess over the past 6 months, but not a large one.

Many supply-siders, including myself, believe that gold is an important leading inflation indicator. Changes in gold augur shifts in money value. Rising gold and declining money value since the middle of 2001 could foreshadow higher inflation.

But it might simply indicate a cash-injecting policy by the Fed to move money from a deflationary shortage to reflationary normalcy.

Converting gold to an inflation-adjusted real basis, $391 today is about 50% higher than $259 in the spring of 2001. But today’s level is 13% less than the mid 1990’s average of $448. During that period, inflation averaged 2%.

In real terms, today’s gold is 70% down from its $1314 peak in January 1980. The inflation peak in those days was 10-15%, depending on the price index.




So the real value of gold today seems consistent with less than 2% inflation. Gold stock indexes are about 20% below last autumn’s high, and about 40% under their mid-90’s high.

This is why I am doubtful that gold is truly signaling an inflation rise of any consequence.

Recent monetary trends would underscore this conclusion.

So would a 4.5% 10-year Treasury bond yield, the lowest in about 40 years, along with a flattened yield curve that is in line with the experience of the past non-inflationary fifteen years.

The question is, does the Federal Reserve have a disciplined model that looks at sensitive gold and treasury market signals? Does it look at the monetary trends that contribute to those inflation signals?

Or is the central bank using an outdated Keynesian model that essentially targets the growth of GDP, with a bunch of anecdotes picked up in flawed regional surveys that essentially prove whatever the government bank wants them to prove?

Isn’t it possible that a combination of modest money growth, lower tax rates, high productivity gains, and unusually strong corporate profits would permit an economic scenario of solid growth with tame inflation? One that simply does not require the kind of Fed fine-tuning that in the past has too often resulted in recessionary overkill?

Tonight's Lineup

Tonight on Kudlow & Company, we have:

-- Senator Jon Kyl, on border security and the federal budget

-- a market segment with Jim Glassman and Ned Riley

-- Senator Chuck Hagel on social security

-- Mark Mills on oil and hybrid cars

-- former UNC head coach Matt Doherty

Be Not Afraid

I believe it was sometime in 1993 when I first read the great papal encyclical " Splendor of Truth " written by Pope John Paul II. The slender book was recommended by Fr. C.John McClosky during a conversation when he was counseling me about the worst personal crisis of my life.

Alcohol and drug abuse were dragging me down, and it was a problem that got much worse in the next two years before I finally surrendered to God, literally on my knees, and began a new life of faith-- and sobriety.

I managed to read "Splendor of Truth" that year. It had no direct advice about alcohol and drugs. But, then again, as I came to realize later, it had everything to with it.For the book is about the need for spiritual and moral courage in choosing good over evil in our daily lives. About assuming personal accountablity and responsibility for our actions and behaviors. Abiding by our conscience so we may hear the voice of God and follow His directions.

As a full-fledged member of a 12-step fellowship, I later learned that the biggest problem facing all those who suffer from chronic addictions is "sickness of the soul." Exactly what the Pope talks about in "Splendor of Truth." John Paul II tells us to "be not afraid" in pursuing the life of faith. Be not afraid to trust God. Be not afraid to stand for the right values. Be not afraid to be faithful to your spouse, or helpful and unselfish to friends, or diligent in work and other duties in everyday life.

On a much grander scale the Pope tells us to pursue right values concerning the sanctity of human life, human rights, freedom,and democracy. He preaches a moral theology that applies to everything. Be not afraid in this pursuit of God's will and the teachings of Jesus Christ. It is a life that requires courage, but it is precisely this moral courage that gives our lives meaning and purpose.

John Paul II lived and applied his own teachings. He had a toughness of character in pursuit of his beliefs. His ability to dodge the Nazis, and then the Communists when he grew up in Poland is the stuff of legend.Then his rapid rise through the Church hierarchy. Then his first visit to Poland as Pope, which was surely a turning point in the Polish liberation from the evils of Soviet totalitarianism.And his working with Pres. Reagan to bring down the Ir