NCPA - National Center for Policy Analysis

The Case For Continuing Prosperity

April 18, 2000

Economic experts are divided over what the jolts to the stock markets last Friday portend for the future of the U.S. economy. Some argue that even greater prosperity is in the cards, while others warn that the days of reckoning are coming.

The pessimists say that:

  • The U.S. has been floating on an unprecedented expansion of credit -- with debt reaching $17.5 trillion in February 2000, up 6.5 percent from a year earlier.
  • The economic growth rate fell two percentage points during the same period.
  • Out of more than $30 trillion in assets, Americans have less than $4 trillion in liquid assets, such as bank deposits -- the rest being invested in stocks, homes and other assets.
  • Taxes at all levels exact nearly 40 percent from the incomes of Americans.

On the other hand, optimists say:

  • State and local taxes have declined for five straight years and the prospects for federal tax cuts look good once Social Security is reformed.
  • Tax reductions spur economic growth and accelerate returns on equities -- with growth averaging 0.6 percentage point higher during periods since 1926 (excluding World War II) when the top personal income tax rate was lowered.
  • The Standard & Poor's 500 posted an average annual total return 4.3 percentage points higher when top marginal tax rates were lower than in years when rates were higher.
  • World trade is likely to continue growing -- and periods of freer trade coincide with above average annual growth of 4.2 percent and above-average stock market returns of 14.9 percent a year.

So while the nation may be overextended at present, further trade liberalization and lower taxes could assure prosperity in perpetuity.

Sources: George Melloan, "What About Those Sound Economic Fundamentals?" and Charles W. Kadlec (J. & W. Seligman & Co.) "Don't Worry, the Great Prosperity Is Still Coming," both in the Wall Street Journal, April 18, 2000.

 

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