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August 2, 2002, 8:45 a.m. Partial Policies Mean Partial Recoveries This week’s lower GDP numbers tell only part of the story. By Jerry Bowyer

he U.S. gross domestic product grew at an annual rate of 1.1% for the second quarter, following a more robust 5% rate for the first three months of the year. So who's to blame?

Theories of economics are vindicated three ways: when they are obeyed successfully, when they are disobeyed unsuccessfully, and when they are partially obeyed partially successfully. The latest GDP estimates prove all three principles. Here's what the numbers demonstrate:

First, the Clinton recession was real. The debate is finally over. Clearly, the economy was slowing down as the Clinton administration was wrapping up. The middle Clinton years were terrific, filled with all sorts of supply-side goodies: trade liberalization, welfare reform, telecommunications and energy deregulation, stable prices, and a capital-gains tax cut to top it all off. But the end wasn't nearly so good: Clinton, driven leftward to his base, started backing off from free trade, blocking mergers like WorldCom and Sprint (a fact conveniently forgotten by Democrats who are trying to pin WorldCom's woes on Bush), and attempting to break up Microsoft.

Not surprisingly, neither the economy nor the capital markets responded well. Bush tried to discuss it during the election and shortly thereafter, but he was accused by the media of "jawboning" the economy downward. In other words, they said the slowdown was not real and Bush, whose father was voted out for not talking enough about recession, was condemned for talking too much about one. During the next year, 2001, the slowdown had turned into a genuine recession while Clinton was still the president.

When Bush took office, he was criticized for sticking with his tax-cut pledge. The criticism? It would rob the Social Security "trust fund." But Bush promised this would not happen unless there was a war or recession. But there was no recession we were told; Bush had inherited a healthy economy. Now we know the truth. When Bush took office in January of 2001 the recession had already started. When Bush signed his tax cut on June 7 that year the economy was shrinking even more rapidly.

The Bush tax cut was very well timed. For the first quarter of 2001 the economy was shrinking by more than half a percent; during the second quarter it was shrinking at about three times that rate. Then, at the end of that quarter, Bush signed his tax cut and the economy turned the corner almost immediately: the rate of shrinkage went down two-thirds in the next quarter and the economy has grown every quarter since then.

Still, the economy didn't grow in this year's second quarter as well as it did in the first. What happened? The Bush tax cuts were mostly demand-side — not supply-side — so the recovery is weaker than it had to be.

Supply-side economists have found themselves constantly frustrated by the administration's explanations for the Bush economic-recovery program. The president himself and cabin officials like Treasury Secretary Paul O'Neill told us that the purpose of the tax cuts was to get money back in people's hands so they could spend it and "stimulate" the economy. But supply-siders know that demand is never the problem; demand is infinite — the problem is always supply.

Governments that spend time encouraging, cajoling, or deceiving their citizens into demanding goods and services are wasting their time. The trick is to create a set of incentives that encourage entrepreneurs to supply these goods and services. The Bush tax cut, which accelerated middle-class tax cuts and deferred tax cuts for the entrepreneurial class, was already largely a demand-side solution, but the decision to add a rebate to that made it even worse.

A detailed examination of the component parts that were used to calculate the latest GDP numbers, which were announced this week, indicates that consumer demand is not the problem and never was. The weaker-than-expected economic growth last quarter was due principally to a decline in business investment led by a precipitous decline in investment in business structures (-14%). This means that people were buying plenty, but businesses were not investing in long-term assets like structures.

The lesson here is simple: the GDP numbers are disappointing principally on the supply-side, and only supply-side policies (such as accelerating the Bush tax cuts) will end our disappointments.

— Jerry Bowyer is the chairman of Impact Mutual Funds and a television and radio talk show host. He can be reached through his web page: www.jerrybowyer.com.