The mainstream media has already wasted reams of newspaper, not to mention thousands of trees, in trying to decide whether or not President Bush’s budget proposal is a deficit-reducer. Once again, they’ve missed the key point: The central defining aspect of Bush’s budget submission is that it is pro-growth.
I asked Josh Bolten, director of the Office of Management and Budget, if the president’s proposal to make the 2003 tax cuts permanent was in the budget. He answered yes. This is crucial to economic growth and deficit reduction. More, it signals that Bush is not backing off. It sends an important message to Sen. Connie Mack’s tax-reform commission that a 15 percent tax rate on capital gains and dividends, along with abolishing the estate tax, is a high presidential priority.
Beyond this important threshold, Bush deserves credit for his toughest effort thus far to restrain federal spending. Overall discretionary spending is aimed at slightly less than the projected inflation rate. Excluding homeland security and defense, discretionary spending actually falls in inflation-adjusted terms. There are also some tentative efforts in the budget to reduce the growth rate of entitlement spending, especially Medicaid. And the administration is finally waging war on farm-sector welfare queens.
Overall federal spending as a share of GDP is projected to trend around 19.5 percent. This is a historically low spending share of the economy. If maintained, more resources will stay in private hands to foster entrepreneurship, new business creation, jobs, and wealth.
The deficit, meanwhile, is projected to fall to about 1.3 percent of GDP from the current 3.5 percent over the next 5 years. This is well below European and Japanese deficits. Should the U.S. economy grow faster than the 3.3 percent yearly estimate in the OMB baseline, then the budget will move into balance in just half a decade.
More important, at lower tax rates, Treasury coffers are rapidly filling up with rising tax collections. The Laffer Curve is alive and well. Over the past twelve months individual income-tax collections have increased by 15 percent. Non-withheld individual collections, which include stock market-generated capital gains and dividends, have increased 14 percent.
This didn’t happen on its own. In June 2003 the president signed tax-reform legislation that immediately lowered the top personal tax rate to 35 percent. Investment tax cuts were also part of that reform. The economy’s recovery rate subsequently doubled from the new dose of supply-side incentives.
Josh Bolten, sounding a lot like a supply-sider these days, is well aware of these developments. He notes that upper-income taxpayers are paying more of the total share of tax collections even while their marginal rate has been reduced. Hence, Bush’s first-term tax reform has led to even greater productivity, along with increased investment incentives and reduced tax evasion. Another supply-side policy experiment has proven successful.
Deficit teeth-gnashing will go on forever. But there is no evidence that a temporary deficit increase to finance recovery investment has had any ill effect on the economy. Well-run businesses sometimes borrow to invest in future expansion. So must the federal government. The latest government statistics show that private-sector GDP growth is rising at better than 5 percent, while core inflation is a tame 1.5 percent. At 5.2 percent unemployment, the economy is moving steadily towards full utilization of the available workforce.
Rubinomics — the idea of Clinton’s former Treasury secretary that deficits always cause bond rates to rise — is wrong once again. Treasury bond yields are only slightly higher than 4 percent, suggesting a 1950’s scenario rather than a pessimistic future disaster.
The Bush administration has set down principled markers on economic and budget policy — namely that the surest path to deficit reduction is federal budget restraint and tax-cut-spurred economic growth. As the prosperity pie grows larger and incomes rise, revenues fill in the deficit gap while spending is slowed. It’s a growth solution, not an austerity one.
Fortunately, Bush will have two tough congressional enforcers to implement his plan. Both Senate Budget chair Judd Gregg and House chair Jim Nussle are spending hawks. Look for them to drive tough-minded reconciliation instructions that will force weak-kneed appropriators to stay on track.
Of course, all of this is a legacy of Reaganomics. The great president would have been 94 last Sunday. While his soul rests in heavenly peace, his vision and ideals are alive and well right here on earth.
President George W. Bush deserves much credit for maintaining and expanding on the Reagan vision. Whether spreading freedom and democracy abroad, or ownership policies for more economic freedom at home, Bush continues to stoke the fires of liberty.
— Larry Kudlow, NRO’s Economics Editor, is host with Jim Cramer of CNBC’s Kudlow & Cramer and author of the daily web blog, Kudlow’s Money Politic$.