An abiding mystery on the political scene is why President Bush and congressional Republicans get so little credit for America’s remarkably good economy. Perhaps it’s high gas prices, jitters over globalization, the admitted overspending of recent years, all compounded by a consistently negative press that sees a downside in every good-news economic story.
But sooner or later, the numbers that matter most tell a story than cannot be denied, even by those addicted to trashing Bush.
The Bush White House can now boast of 18 consecutive quarters of strong economic growth surpassing that of Europe and Japan combined, 5.4 million new jobs created since 2003, the lowest unemployment rate in 40 years, steady gains in worker productivity and record levels of home ownership.
These achievements are all the more remarkable given the economic adversity they overcame: The dot.com bust at the end of the 1990s, the recession and stock market decline that Bush inherited, the 9/11 terrorist attacks, two wars and a punishing run-up of energy costs.
An economy that can thrive and prosper despite all that must be doing something right.
Now comes more good economic news. Federal budget deficits, traditionally a lagging indicator in every recovery from recession, are shrinking.
Just six months ago, the number crunchers at the White House Office of Management and Budget were forecasting a 2006 budget deficit of $423 billion. No more. OMB’s Mid-Session Review released July 11 shows a sharply falling deficit of $296 billion for the fiscal year that ends Sept. 30. That’s a 30 % decline in deficit forecasts in just half a year.
But the real story here is the success of the 2003 Bush tax cuts.
As expected, cutting taxes on dividends and capital gains and paring marginal income tax rates boosted incentives for work, savings and investments. Lower tax rates produced a dramatic increase in economic growth. As The Wall Street Journal’s editorial page noted, growth rates that averaged a paltry 1.1 % per year over nine quarters before the 2003 tax cuts swelled to 4 % a year after the tax cuts produced new incentives.
Just as predictably, cutting taxes eventually produced more, not less, tax revenues for the federal coffers. In 2005, federal tax revenues increased by $274 billion, a whopping 15 % hike over the previous year. For the first nine months of the 2006 fiscal year, tax revenues are up another 12 %-plus, or $206 billion. It’s this rapidly rising revenue tide that is shrinking the deficit despite continued high spending for the war in Iraq and the recovery efforts from Hurricane Katrina.
A booming economy coupled with spending restraints wiped out federal budget deficits in the late 1990s. The same formula can work in this decade, as the revenue tide produced by strong economic growth is already showing.
Democrats argued that Bush’s "tax cuts for the rich" would cripple revenue collection. Wrong. Federal revenues this year are currently projected to be $2.4 trillion, slightly above revenue levels collected before the 2003 tax cuts. For fiscal year 2006, federal tax revenues are projected to be 18.3 % of gross domestic product, a shade over the historical average of 18.1 % for the last 50 years.
So much for the loopy notion that tax cuts cripple the government’s ability to collect adequate revenues. In fact, as this and past tax cuts in the 1960s and 1980s show, the stronger growth spurred by cutting tax rates produces a larger economy and, before long, more government revenue as a result.
As for the deficits themselves, a bit of perspective is in order.
What matters isn’t the nominal size of the budget deficit but its relative size in comparison to an overall economy now approaching $13 trillion in annual production of goods and services. This year’s deficit will equal about 2.3 % of GDP, proportionally smaller than two-thirds of the budget deficits over the past quarter century.
OMB Director Rob Portman’s latest figures show the projected deficit falling to $157 billion by 2009, a mere 1 % of GDP. Well before that, the deficits’ economic relevance, and its utility for Bush bashing, should vanish.
The point here isn’t that budget deficits don’t matter at all; rather that what matters far more is putting in place pro-growth economic policies. On this vital measure, Bush and the Republicans can argue that they’ve kept the proper focus. More specifically, they can argue that the Bush tax cuts and overall economic policies are working to build the bigger, stronger economy that benefits almost everyone.
Bush and Portman are touting the latest economic numbers as vindication. Naysayers notwithstanding, they have a compelling case. Now, the White House surely wishes, for a little of the political credit that should attend such a robust economic recovery.