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Dan

Calabrese

 

 

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December 7, 2005

Supply-Side Works Every Time

 

When the “enlightened” insist that “abstinence doesn’t work” in preventing teen pregnancy, the clear-headed reply that it works every time it’s tried.

 

It’s time the discussion of supply-side economics took on the same character.

 

The economy hasn’t been much in the news lately, but here’s a news flash: It’s terrific. So terrific, in fact, that even the National Association of Manufacturers is celebrating. Remember American manufacturers? The people whose days were numbered as jobs headed off to China, Mexico and India? They just added jobs for the second consecutive month – the first time that’s happened in over a year.

 

And there’s more. The Gross Domestic Product has grown at least 3.3 percent for 10 consecutive quarters, including 4.3 percent in the most recent quarter. The economy added 215,000 jobs overall in November, bringing the net number of jobs added during the Bush administration to 1.2 million. Since 2003, when one could argue that Bush’s policies really came into full force, we have added 4 million jobs. “Economic Contrarian” Mike Norman estimates we have increased output by $3 trillion under Bush, and increased overall wealth by $8 trillion.

 

People are buying more durable goods. Consumer confidence is up. The stock market is nearing 11,000 for the first time since 2001.

 

Supply-side economics has worked again. It always does.

 

It’s hard to remember much about the Bush administration prior to 9/11, but in the summer of 2001, the biggest substantive news story was Bush’s tax cut proposal. Bush argued that cutting marginal rates would spur private-sector investment and promote economic growth. Democrats, in addition to their beloved class-warfare rhetoric, responded with the usual talking point that tax cuts would be irresponsible because they would rob the federal treasury of needed revenue.

 

A decade earlier, they had rolled Bush’s father with this argument, arm-twisting him into raising taxes and then blaming him when the economy went south. Fortunately, this Bush looks to a better historical example of economic wisdom.

 

Cutting tax rates reduces revenue, eh? As Bush knows, that’s not what happened when Ronald Reagan cut taxes. Quite the opposite, in fact. When Reagan took office – with the highest marginal tax rate an astounding 70 percent – annual federal revenues were just over $500 billion. After Reagan cut taxes across the board, reducing the highest rate to 33 percent, federal revenues boomed – nearly doubling in real-dollar terms by the end of his presidency.

 

So Bush – seeking the same results – pushed through his tax cut program in 2001, then came back and cut taxes again in 2002 and 2003.

 

The logic of supply-side economics is almost as unassailable as the reason abstinence prevents pregnancy. Excessively high tax rates discourage investment by removing wealth from the private sector, slowing growth and reducing federal revenues. Lower tax rates, by contrast, encourage investment, spur growth and increase federal revenues.

 

Bush knew it worked in the 1980s, and he knew it would work it again. The envelope? Federal revenues last year were up 14.8 percent compared to the previous year. This year, they are expected to increase even more. That’s because there is more wealth to tax, so even with lower rates, you collect more money.

 

The investment part came true as well. The NAM reports that business spending on equipment and software grew by a 10.8 percent annual rate in the third quarter.

 

It worked again. Why this should surprise anyone is the real mystery. Supply-side is the most logical economic philosophy we have because it recognizes that the effect of tax rates on the health of the economy – just as any Main Street retailer recognizes you don’t make more money by trying to charge $100 for a candy bar.

 

Yes, we still have problems. The budget is still in deficit, since spending is also up, although the deficit as a percentage of the GDP is a pittance compared to most of Europe. We still face high fuel prices. And we face major auto plant closings, which tend to get the headlines, but are really the result of decades of overcapacity and legacy costs that have nothing to do with the economic policies of Bush or any other president.

 

There will always be some problems in the economy. But the overall news is astoundingly good, which you’d think would get people’s attention. Supply-side economics works. Every time it’s tried.

 

© 2005 North Star Writers Group. May not be republished without permission.

 

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