HOD
2004-01-03 16:38:36 UTC
Posted on Sat, Jan. 03, 2004
ECONOMY
Despite critics, tax cuts work
BY ALISON FRASER
Bad news: The economy is booming. Bad news, that is, for those who insist,
in the face of mounting evidence to the contrary, that the tax cuts approved
earlier last year aren't working. The critics are running out of negative
spin.
When the news came in November that economic growth in the third quarter of
the year had surged to 8.2 percent -- the best growth that we've seen in
nearly 20 years -- they had a ready retort: It's a ''jobless recovery.'' Not
anymore. Are we where we should be? No. But we're moving there at a
remarkable pace. More jobs are available, and fewer people are unemployed.
This crop of good news promises economic growth throughout this year and
likely next.
Job growth has increased during the last four months, and we've added
328,000 new jobs to the economy. In related good news, the unemployment rate
has slipped to 5.9 percent, erasing the poor performance of 2002.
What's significant about these figures is their signal that the economy is
not merely poised for recovery, but in the midst of it. Job growth is
usually the last patch in the economic recovery quilt. These patches now all
appear to be in place. With few exceptions, economic indicators are up
across the board.
Indeed, the stellar growth of the last quarter outpaced the expectations of
even the most optimistic forecasters. Three sources of growth in particular
show why the recovery is structurally sound:
. Business investment has grown significantly in the last six months and at
an especially good clip in the last three months, which means that a crucial
part of the economy is picking up steam. Businesses don't invest in
equipment unless they plan on producing more, and to do that, they need more
people. This is a critical signal that businesses are more confident and
that they believe that they can increase their activities without undue
risk.
. Business activity is on the rise for the manufacturing sector as well as
the service sector. Manufacturing activity is at its highest levels in 20
years, with new orders and production soaring. The performance of both
sectors indicates that the recovery is well under way and sustainable.
. Business productivity grew 9.4 percent in the third quarter, more than
twice the normal growth rate. But there is even more good news: Month after
month, productivity gains are accompanied by signs of life on the employment
side.
While consumer spending has done much to sustain the economy throughout the
recovery, business investment, activity and productivity are what cause job
growth, and these missing links now appear to be in place.
What about manufacturing jobs? Unfortunately, they continue to languish,
with a drop in November of 17,000 jobs. But this is nothing new.
Manufacturing jobs have been declining for a generation, but our economy has
not come to the screeching halt that some predicted.
Instead, better-paying jobs in the service sector, which includes everything
from financial, banking, health and legal services to retail and
construction, have replaced manufacturing jobs. This may not offer much
comfort for those in manufacturing, but the fact is that our economy has
evolved structurally just as it did between 1890 and 1920, when we moved
from an agricultural economy to a manufacturing one. Jobs in this new
framework are more knowledge-based, offer higher wages and provide more
freedom to climb the ladder of economic prosperity.
Incentives for businesses
One question remains: Why are we getting this good news now?
Many factors are involved, of course, but critics cannot ignore the fact
that the tax cuts are working. They built a foundation for bringing the
recovery full swing by providing incentives for businesses to expand and
invest. Tax relief has lowered the cost of capital and made existing
enterprises more profitable and investment and expansion more attractive.
As the economy continues to grow, we can almost certainly expect to
experience even stronger jumps in employment (especially if we make the tax
cuts permanent). That may be bad news for those who earn their living by
opposing tax cuts and other pro-growth strategies, but it's definitely good
news for the rest of us.
Alison Fraser is director of the Heritage Foundation's Roe Institute for
Economic Policy Studies.
©2003 The Baltimore Sun
ECONOMY
Despite critics, tax cuts work
BY ALISON FRASER
Bad news: The economy is booming. Bad news, that is, for those who insist,
in the face of mounting evidence to the contrary, that the tax cuts approved
earlier last year aren't working. The critics are running out of negative
spin.
When the news came in November that economic growth in the third quarter of
the year had surged to 8.2 percent -- the best growth that we've seen in
nearly 20 years -- they had a ready retort: It's a ''jobless recovery.'' Not
anymore. Are we where we should be? No. But we're moving there at a
remarkable pace. More jobs are available, and fewer people are unemployed.
This crop of good news promises economic growth throughout this year and
likely next.
Job growth has increased during the last four months, and we've added
328,000 new jobs to the economy. In related good news, the unemployment rate
has slipped to 5.9 percent, erasing the poor performance of 2002.
What's significant about these figures is their signal that the economy is
not merely poised for recovery, but in the midst of it. Job growth is
usually the last patch in the economic recovery quilt. These patches now all
appear to be in place. With few exceptions, economic indicators are up
across the board.
Indeed, the stellar growth of the last quarter outpaced the expectations of
even the most optimistic forecasters. Three sources of growth in particular
show why the recovery is structurally sound:
. Business investment has grown significantly in the last six months and at
an especially good clip in the last three months, which means that a crucial
part of the economy is picking up steam. Businesses don't invest in
equipment unless they plan on producing more, and to do that, they need more
people. This is a critical signal that businesses are more confident and
that they believe that they can increase their activities without undue
risk.
. Business activity is on the rise for the manufacturing sector as well as
the service sector. Manufacturing activity is at its highest levels in 20
years, with new orders and production soaring. The performance of both
sectors indicates that the recovery is well under way and sustainable.
. Business productivity grew 9.4 percent in the third quarter, more than
twice the normal growth rate. But there is even more good news: Month after
month, productivity gains are accompanied by signs of life on the employment
side.
While consumer spending has done much to sustain the economy throughout the
recovery, business investment, activity and productivity are what cause job
growth, and these missing links now appear to be in place.
What about manufacturing jobs? Unfortunately, they continue to languish,
with a drop in November of 17,000 jobs. But this is nothing new.
Manufacturing jobs have been declining for a generation, but our economy has
not come to the screeching halt that some predicted.
Instead, better-paying jobs in the service sector, which includes everything
from financial, banking, health and legal services to retail and
construction, have replaced manufacturing jobs. This may not offer much
comfort for those in manufacturing, but the fact is that our economy has
evolved structurally just as it did between 1890 and 1920, when we moved
from an agricultural economy to a manufacturing one. Jobs in this new
framework are more knowledge-based, offer higher wages and provide more
freedom to climb the ladder of economic prosperity.
Incentives for businesses
One question remains: Why are we getting this good news now?
Many factors are involved, of course, but critics cannot ignore the fact
that the tax cuts are working. They built a foundation for bringing the
recovery full swing by providing incentives for businesses to expand and
invest. Tax relief has lowered the cost of capital and made existing
enterprises more profitable and investment and expansion more attractive.
As the economy continues to grow, we can almost certainly expect to
experience even stronger jumps in employment (especially if we make the tax
cuts permanent). That may be bad news for those who earn their living by
opposing tax cuts and other pro-growth strategies, but it's definitely good
news for the rest of us.
Alison Fraser is director of the Heritage Foundation's Roe Institute for
Economic Policy Studies.
©2003 The Baltimore Sun
