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Kerry’S Economic Deficit
The challenger will have trouble darkening this bright picture.


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Larry Kudlow

If it’s not bad enough that rapid economic recovery has neutered Sen. Kerry’s principal domestic criticism of President Bush, now comes even worse news for the Democratic campaign: The budget deficit is starting to substantially shrink.

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The latest budget numbers show a $19.1 billion surplus for June, $3 billion higher than the $16 billion Wall Street expectation. It seems that a flood of new tax collections, spurred by fatter employment payrolls and corporate profits, is rapidly reducing the federal budget gap. Tax receipts from businesses rose an astonishing 38 percent over the past twelve months and personal income-tax collections increased almost 9 percent. What’s happening? Could it be that stronger economic growth from lower tax rates is producing more tax receipts? I believe it’s called supply-side economics.

Just as the 1.5 million new jobs created since last August has terminated talk of a jobless recovery, the chatter over widening budget deficits will end. The fiscal-year 2004 budget deficit now looks to come in around $435 billion, less than 4 percent of GDP. This would be almost $100 billion below early-year estimates from the Office of Management and Budget and about $50 billion less than Congressional Budget Office forecasts. The administration is also getting its arms around federal spending. Fiscal year to date, domestic discretionary program spending has slowed to 2.7 percent from 6.8 percent a year ago.

As the tax-cut-led recovery continues, deficits will rapidly wane over the coming years.

Former Clinton economic officials Robert Rubin, Gene Sperling, and Bowman Cutter — all now advising Kerry — continue to obsess over the alleged economic consequences of budget deficits. But there is virtually no evidence that the budget gap (two-thirds of which emanated from the Clinton recession) has had any negative effect on U.S. recovery prospects. In fact, even with the fastest economic growth in twenty years, long-term Treasury rates remain at 4.5 percent, the cheapest money in over forty years.

All this is why Kerry’s proposal to raise tax rates on upper-income individuals, small businesses, and key investment categories like capital gains and dividends is so completely out of touch. The Kerry tax hikes will blunt the good news on growth and deficits, exactly the reverse of what the pessimistic Kerryites are predicting.

Like the modern Democratic party, the Kerryites neither understand nor acknowledge the tax-incentive model of economic growth that simply restates an old truism: Individuals produce and invest more if it is more profitable after-tax to do so.

Ironically, by placing his $900 billion government-funded health-care plan at the center of his economic policy, Kerry has dropped any pretense of deficit reduction. He may take great pains to position himself as a Clinton-type moderate Democrat, but his policies are pure tax-and-spend liberal.

Oddly, when they dare to discuss the economic picture, one that clearly validates Bush’s pro-growth policies, the Kerryites talk about a middle-class “squeeze.” This is counter-factual. After-tax incomes adjusted for inflation have jumped 4.3 percent over the first five months of this election year, compared with the same period a year ago. That’s why retail spending over the first six months of 2004 has increased 7.7 percent compared with the year-ago period. The middle class wouldn’t be spending quite so rapidly if they were squeezed in the way the Kerry complainers allege.

Factual fallacy is at the heart of the Kerry campaign. In another blatant example, Kerry charges that health costs are spiraling out of control. While there is no question that the nation’s health system needs more consumer choice and private-sector competition, with less third-party payments, health costs are dropping. According to the Commerce Department, the weighted average of medical-benefit costs has slowed to only 0.6 percent in the twelve-month period through May. It is possible that some of the progress on this front has resulted from the tax-free, pro-competition, health savings accounts included in last year’s health reform bill, which was sponsored by President Bush.

Here are some more data that ride counter to claims being made by the Kerry campaign: The percentage of children without health insurance fell from 13.9 percent in 1997 to 10.1 percent in 2003, according to the Centers for Disease Control. During the same period, the percent of all children without health insurance for a year or more dropped to 5.3 percent from 8.4 percent. And the percent of “near poor” with public health-care coverage expanded to 47.2 percent in 2003 from 22.9 percent in 1998.

In other words, the Kerry campaign’s dark picture of American economic and social life is simply untrue. And in the areas where future improvements are necessary — including the Social Security system — a big-spending, overarching, government-regulatory scheme is not the answer. What is? Greater individual responsibility and personal choice in the context of our free-enterprise market system. It’s what will make this thriving nation even more prosperous.

— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.



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