December 8, 2003 | Commentary on Federal Budget
With glad economic tidings rolling in from all fronts, it's
beginning to look a lot like . . . a recovery. Are we where we
should be? No. But we're moving there at a remarkable pace. More
jobs are available and fewer people are in the unemployment lines.
And the evidence indicates that this crop of good news promises
solid economic growth throughout next year and likely the year
after that. The recession is finally behind us -- and now,
fortunately, so is the slow growth that has marked the recent
The economy grew at a stellar 8.2 percent in the third quarter -- the best growth we've seen in nearly 20 years. Job growth has increased over the past four months, adding 328,000 new jobs. In related good news, the unemployment rate continued to decline, falling to 5.9 percent.
Why are we getting all this good news now? Many factors are involved, but we can't ignore the fact that the tax cuts Congress and President Bush approved this year are playing a major role. The "Jobs and Growth Tax Relief Reconciliation Act of 2003," it appears, was aptly named.
Spending a minor factor
Credit for the current spate of good news, incidentally, has less to do with consumer spending than many people realize. Such spending has helped sustain the economy throughout the recovery, but spending alone doesn't create jobs. The 2003 tax cuts built a foundation for the recovery by giving businesses incentives to expand and invest.
Tax relief has cut the cost of capital, making investment and expansion more attractive and allowing existing enterprises to operate more profitably. Plus, it's providing incentives for individuals to work, save and invest more.
The business activity we're seeing now flows directly from important pro-growth elements in the tax cuts that set the stage for increased entrepreneurial activity, investment and expansion.
Areas of growth
When the tax cuts were enacted, "supply side" economists predicted they would promote faster economic growth, job creation, a drop in unemployment and a marked increase in investment, not to mention improvement in the stock market. The numbers bear this out.
Yet the phenomenal economic performance of recent months has outpaced expectations of even the most optimistic forecasters. Four areas of growth in particular illustrate how lowering the cost of capital and investment provided the necessary underpinnings and show why the recovery is structurally sound and sustainable.
New jobs. With business investment and activity on the rise, job
growth is falling smoothly into place. Employment is usually the
last element of an economy to show improvement in a recovery. The
57,000 jobs added to the economy in November continued the upward
trend of the past four months. With the unemployment rate at 5.9
percent, last year's bleak performance is being steadily
As the economy climbs, so do corporate profits and tax liabilities. In fact, recent business revenues have been such that the taxes government at all levels collects from this income will surely be well above current projections throughout 2004. Higher tax revenues, in turn, translate into lower deficits at the federal level and improved fiscal health at the state level.
President Bush's pro-growth tax policies provide a strong foundation for continued economic growth -- not a one-time spurt, as some would have us believe -- by making investment and entrepreneurial risk taking more attractive and rewarding. Which suggests a great holiday present for next year -- making the tax cuts permanent.
Alison Acosta Fraser is director of the Roe Institute for Economic Policy Studies at The Heritage Foundation.
First appeared in The Atlanta Journal-Constitution