NCPA - National Center for Policy Analysis

Resurgent Economy Vindicates Tax Cuts

March 13, 2002

The economy is rebounding, and most economists credit the Bush tax cuts of early 2001, combined with the Federal Reserve's string of interest rate reductions -- which brought the short-term federal funds rate down from 6.5 percent in November 2000 to 1.75 by the end of 2001. That's the lowest rate in more than four decades.

So those Capitol Hill politicians who fought the tax cuts so vociferously last year have some explaining to do.

  • The lower interest rates stimulated consumer spending -- which kept the economy afloat -- through a variety of channels, most notably in the housing sector.
  • Although the personal savings rate has declined to less than 1 percent of disposable personal income, that is expected to rise gradually as current retirees die and younger employees reach their peak savings years.
  • Moderate increases in wages and the sharp 5.2 percent productivity growth caused unit labor costs to decline at a 2.7 percent annual rate -- providing a good case for future price stability.
  • The Congressional Budget Office projects that with the Bush tax cuts and spending proposals, the budget will once again be in surplus in 2005 -- with the annual surplus growing to about 1 percent of gross domestic product by 2010, driving the national debt down to only 21 percent of GDP.

A primary reason for the strength of consumer spending was the tax cut. Although designed for long-term effects, for most taxpayers the future rate reductions were a greater source of economic well being, and therefore a greater stimulus to spend.

Against this background, the nation can begin dealing with the long-term budget problems of Social Security and Medicare.

Source: Martin Feldstein (Harvard University), "Tax Cuts, Rate Cuts Put the Economy Back on Track," Wall Street Journal, March 13, 2002.


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