February 7, 2006

Guess What? Supply-Side Economic Policies Work...Again

Lawrence Kudlow writes about the latest positive economic news in The Silence of the Good News: An explosive jobs report and Bush says nothing? What’s up?:

Economic pessimists have had a field day ever since GDP was reported a week ago at only 1.1 percent for the fourth quarter. But the latest jobs report released on Friday blew them out of the water. Including revisions, January employment is a huge 317,000 above the initial December level. In fact, over the past three months, non-farm payrolls have increased an average 229,000 per month. That’s explosive. We’re on pace for another 2 million jobs in 2006, following gains of 2 million in 2004 and 2005. Wages are also picking up steam, and with gasoline prices falling, consumer purchasing power and retail sales are climbing.

So the question for the Bush Administration is this: What are you waiting for?

As soon as the breakout employment news was released, Salesman-in-Chief George W. Bush should have been in the Rose Garden giving it air time. He should have declared that jobs have continued to grow big time while the unemployment rate has fallen — all the way down to 4.7 percent. He then could have used this optimistic data to build his already strong case for extending the tax cuts on dividends and capital gains. These 2003 tax cuts, along with lower income taxes, are a good reason why jobs numbers are strong and the economy is prosperous.

What are they waiting for?

In his State of the Union message, Bush noted that recent tax relief has left $880 billion in the hands of American workers, investors, small businesses, and families — money that has been used to help produce more than four years of uninterrupted economic growth. People will spend their money more wisely than government will.

Bush ought to keep this drumbeat up. On Friday, the drums were deafeningly silent.

The latest numbers from the Congressional Budget Office show a clear supply-side effect where lower tax rates and higher after-tax rewards for work and investment have expanded the economy and created a huge surge of tax collections. Dan Clifton of the American Shareholders Association first reported that actual revenues from the lower capital-gains tax rate came in $46 billion higher over the last three fiscal years and $62 billion higher over the last three calendar years than congressional estimates. The Laffer curve is alive and well...

Good news is all over this still very new year. The "January effect" — the traditional January stock market rally that follows the traditional December sell-off — was the best since 1999. Same-store retail sales in January beat all projections with a 5.2 percent yearly gain. Car sales have had a nice comeback. And consumer confidence has now increased for three straight months.

Even wages are coming online. According to the Bureau of Labor Statistics, average weekly earnings are up 3.6 percent year-on-year. That’s the best since 2000. Then there’s the personal-income proxy derived from hours worked multiplied by wages. This measure registered a 6 percent gain in the year ending January, way up from 4.5 percent last October. With retail gasoline prices coming down 23 percent last fall, from $3.07 to $2.36, real wages are on the rise.

Pessimists can obsess about a mild housing slowdown, but expanding businesses and jobs are throwing off plenty of income. If only the president would jump on all this positive economic data, the pessimists would be exposed as data-deprived, hyperbolic, and just plain wrong. More, by truly seizing the economic moment, he would strengthen his case for tax-cut extensions. Right now, he doesn’t yet have the votes in the Senate. The battle must be joined...

If there is no turnaround, overspending and headline deficits will politically crowd out the vital tax-cut extensions that are so necessary to investor, business, and consumer confidence.

The supply-side economic growth plan is working. But the governing GOP coalition must close the circle on budget restraint. Economic growth and Republican political longevity depend on it. The president must do his part by turning up the volume on the good-news economic data.

A Wall Street Journal editorial entitled Tastes Great, More Filling (available for a fee) talks about further good news resulting from supply-side economic policies:

...As part of President Bush's 2003 investment tax cut package, the capital gains tax rate was reduced to 15% from 20%. Opponents predicted, as ever, that this would reduce tax revenue.

Not even close. Here's what actually happened. This 25% reduction in the tax penalty on stock and other asset sales triggered a doubling of capital gains realizations, to $539 billion in 2005 from $269 billion in 2002. One influence was the increase in stock values over that time, thanks in part to the higher after-tax return on capital induced by the tax cuts.

But another cause for the windfall was almost certainly the "unlocking" effect from investors selling their existing asset holdings in order to realize some of their profits and pay taxes at the lower rate. They could then turn around and buy new assets, hoping for higher rates of return. This "unlocking" promotes the efficiency of capital markets by redirecting investment into new and higher value-added companies.

It also yields a windfall for the Treasury. In 2002, the year before the tax cut, capital gains tax liabilities were $49 billion at the 20% rate. They rose slightly to $51 billion in 2003, then surged to $71 billion in 2004, and were estimated by CBO to have reached $80 billion last year -- all paid at the lower 15% rate. In short, the lower rate yielded more revenue.

The CBO also found that total tax collections from all "non-withheld tax receipts" -- typically, non-salaried income -- surged by 32%. Dividend tax payments are undoubtedly a big part of that jackpot. Since 2003 when Congress cut the tax rate on dividends paid out to shareholders to 15% from 39.6% (the top income tax rate that was also reduced to 35%), dividend payouts by American companies have roughly tripled. The government gets 15% of those larger payouts, which sure beats 35% of nothing.

None of this is good news for the Rubinomics crowd, who predicted deficit doom from the tax cuts...

All of which means that Senate Republicans would be wise for their own revenue sake to vote quickly to extend the 15% dividend and capital gains rates through 2010 from 2008, as the House has already done. Letting the rates increase would cause tax receipts to decline. Even better, Republicans should vote to make the rates permanent...

Another Wall Street Journal editorial, Look Who's Working (available also for a fee), comments further on the favorable economic news and how the mainstream media won't tell the full story to the American people:

...The economy seems to have begun 2006 with a roar.

Ford's announcement last week that it will lay off 30,000 workers was seized upon by the media as evidence that America is caught in a spiral of industrial decline. We'll be surprised if the news of a 4.7% unemployment rate, the lowest in 4 1/2 years, gets half the attention that the auto layoffs did. In any case, since the Bush investment tax cuts took hold in May of 2003, just under five million jobs have materialized...

Yesterday's report also confirms that America is creating more than 30,000 new jobs, mostly in new-age industries, every week. Real wages are higher now than at the peak of the 1990s boom. This is no burger-flipper economy. You also won't hear much about the fact that the black unemployment rate in America has tumbled in the past three years to 8.9% from 11.5%. Hispanics have seen their jobless rate dip to 5.8% -- nearly their lowest rate ever. Many Latino immigrants are filling employment demand at a record pace, suggesting that these newcomers are assimilating into the labor force fluidly and filling vital economic niches.

And so the American jobs machine rolls on. Will the critics now concede that the 2003 tax cuts were not just "giveaways to the rich?"

You can read more about supply-side economics in these two postings:

Economics 101: Never Underestimate the Incentive Power of Marginal Tax Cuts
Celebrating Reaganomics, 25 years later