Gotta Grow

TAX cutting is a contact sport in Washington, but the Bush economic team appears not to understand this. They have been mau-maued by Democratic class warriors into accepting demand-side tax cuts, and ignoring one of the wise insights that won Milton Friedman a Nobel Prize—that people will not permanently alter their spending behavior in response to temporary government cash injections. The Bush team should have learned its lesson when the $600 consumer-rebate plan failed to stimulate growth this summer. While after-tax disposable income did rise—temporarily—the cash was quite predictably used to pay down credit-card and household debt instead of to make new investments.

Unchastened, the White House is now angling for a congressional deal for yet another temporary consumer tax rebate—this one aimed primarily at low-income earners, most of whom pay only Social Security and other payroll taxes. What the Bush team is forgetting is that profitless companies are rapidly laying off employees, and that worker incomes lost through increased joblessness will overwhelm any tax-rebate benefits. More generally, the administration fails to see that this is not a consumerled recession, but one led on the supply side by investors and businesses. For a supply-side problem, supply-side incentives—not demand-side tax rebates— are the cure.

About the Author

Larry Kudlow

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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TAX cutting is a contact sport in Washington, but the Bush economic team appears not to understand this. They have been mau-maued by Democratic class warriors into accepting demand-side tax cuts, and ignoring one of the wise insights that won Milton Friedman a Nobel Prize—that people will not permanently alter their spending behavior in response to temporary government cash injections. The Bush team should have learned its lesson when the $600 consumer-rebate plan failed to stimulate growth this summer. While after-tax disposable income did rise—temporarily—the cash was quite predictably used to pay down credit-card and household debt instead of to make new investments.

Unchastened, the White House is now angling for a congressional deal for yet another temporary consumer tax rebate—this one aimed primarily at low-income earners, most of whom pay only Social Security and other payroll taxes. What the Bush team is forgetting is that profitless companies are rapidly laying off employees, and that worker incomes lost through increased joblessness will overwhelm any tax-rebate benefits. More generally, the administration fails to see that this is not a consumerled recession, but one led on the supply side by investors and businesses. For a supply-side problem, supply-side incentives—not demand-side tax rebates— are the cure.