October 23, 2003, 9:00 a.m.
The Bush Recovery Is Blossoming
. . . and new jobs are on the way.

By Cesar V. Conda

Fasten your seat belts: U.S. economic growth and job creation is about to shift into higher gear, and much of the credit goes to the supply-side tax-cutting policies of President George W. Bush.

After weathering the recession, corporate accounting scandals, economic fallout from the 9/11 attacks, and the War on Terror, the U.S. economic recovery is picking up steam:

— In the second quarter of this year, the economy grew 3.3 percent, while business fixed investment increased 8 percent.

— Real disposable personal income is up 3.8 percent at an annual rate in 2003.

— Orders of manufacturing goods have been increasing since earlier this year.

— Shipments of durable goods increased this summer after months of stagnation.

— Corporate profits have rebounded.

— Industrial production is up 4.5 percent at an annual rate in the last three months.

— Housing starts are up 4.3 percent on an annualized basis.

Forecasters now predict 4 to 5 percent growth of real gross domestic product in the last half of this year, and at least 4 percent throughout 2004. All of this good economic news has sent the stock market soaring. In the year since the market bottomed on October 9, 2002, the Dow and the tech-heavy Nasdaq have increased 33 percent and 72 percent, respectively. These gains have recovered $2.7 trillion in shareholder wealth, according to the American Association of Shareholders. The investor class is alive and kicking again.

And now, the optimism on Wall Street is beginning to be felt on Main Street. Employment, which often improves in the later stages of an economic recovery, has finally turned the corner. In September, non-farm payroll jobs jumped by 57,000, the first gain since January. Although manufacturing jobs decreased by 29,000, it was the smallest drop since July 2002, suggesting that the worst may be over. Jobless claims have fallen below the benchmark of 400,000, which indicates an improving jobs market.

However, the economy must grow faster than labor productivity in order to reduce the unemployment rate. Productivity growth has remained strong, even during the recession. In the second and third quarters of this year, productivity grew at a phenomenal 7 percent rate. The reason: Businesses have been squeezing output from current workers to meet the growing demand for goods and services. But as firms add new workers, this cyclical burst in productivity growth should recede to 1 to 2 percent in the coming months as new employees are rarely productive — it takes time to learn a new job.

With real GDP growing at 4 percent or more and productivity growing at 1 to 2 percent for a good portion of next year, U.S. companies will have to add between 120,000 and 180,000 jobs a month to meet the additional 2 to 3 percent in demand and output. At this pace, the Bush recovery could produce almost enough jobs in 2004 to counteract the jobs lost due to the recession.

To be sure, the easing of global tensions and expansionary monetary policy have helped the economy. But the driving force behind this expansion has been the three tax reductions proposed and signed by President Bush. Under the cumulative impact of these laws, 109 million American taxpayers will see their taxes decline by an average of $1,544 this year. Lowering dividends and capital-gains taxes will provide an average of $798 in relief for 26 million investors. Most important, the supply-side cuts in marginal income, dividend, and capital-gains rates have significantly increased the after-tax incentives to work, invest, save, and take risks — all essential ingredients for long-term economic growth and prosperity.

Without Bush tax cuts, the recession would have been much deeper, causing as many as 1.5 million additional people to lose their jobs, according to the Council of Economic Advisers.

Despite these economic facts, all of the leading Democratic presidential candidates have called for reversing the tax cuts, and especially for a reduction in the top marginal rate. Not only would this hurt the recovery — just as it is gaining momentum — it would punish the engines of job creation: America’s small-business owners. According to the Treasury Department, of the taxpayers who benefited from the cut in the top rate from 38.6 percent to 35 percent, two-thirds are small-business owners. Reversing the cut in the top rate would impose a $69 billion tax increase on small business entrepreneurs.

While the president’s economic program to date has focused on tax-rate cuts, ironically the only consensus reached thus far among Democratic presidential candidates is to raise tax rates — the Walter Mondale approach to economics. Even advocates of Keynesian economics would not recommend raising taxes at the start of an economic recovery. Instead of raising taxes on job creators, the Congress should deepen and extend the recovery by making the Bush tax-rate cuts permanent, controlling the growth of discretionary spending, and reducing regulatory and litigation costs on both large and small businesses. Faster economic growth will ultimately produce the additional tax revenue needed to reduce the budget deficit.

While tax cuts are good for individuals and families — allowing them to keep more of the money they earn — we are witnessing once again that reducing taxes also makes America a more prosperous nation.

— Cesar V. Conda, former domestic and economic policy advisor to Vice President Dick Cheney, is a board director of Empower America.

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