- The Washington Times - Thursday, April 4, 2002

Since September 11, America has been waging a two-front war: against terrorism abroad and recession at home. Last week's news that the economy grew 1.4 percent during last year's fourth quarter indicates that the war on recession may be going as well as the one overseas. However there is one fundamental difference. While the fight against terrorism has demonstrated the importance of new military technology, the war on recession has demonstrated the importance of old-fashioned economic fundamentals: Tax cuts work.

The U.S. economy had begun to slow significantly by the summer of 2000. Industrial production peaked in June and fell nearly 3 percent through March 2001 the recession's beginning. Total sales volume in the manufacturing, wholesale and retail sectors began falling in real terms in September 2000, and had declined more than $8 billion by March. By November 2000, unemployment had begun to rise and was up 0.4 percent by March with more than 400,000 manufacturing jobs lost.

The tax cut countered this with immediate, direct relief in the form of a prefunded tax cut via $36 billion in checks to taxpayers and evidence of a turnaround was visible prior to September. Retails sales rebounded in July and August as consumer confidence strengthened. The drop in nondefense capital goods orders flattened and the index of leading economic indicators began to rise. The nation's official determiner of recessions, the National Bureau of Economic Research (NBER) wrote as a result: "Before the attacks, it is possible that the decline in the economy would have been too mild to qualify as a recession."

Then came September 11. This unspeakable blow to the nation was also a terrible hit on the nation's still weak economy. The result was a 1.3 percent economic decline in the third quarter.

Yet without the tax cut to backstop the economy, the effect would have been much worse. According to the President's Council of Economic Advisers, without the tax cut the economy would have shrunk twice as much in the third quarter 2.5 percent vs. the 1.3 percent actual and fallen 1 percent in the fourth quarter instead of rising 1.7 percent. The tax cut will have created more than 800,000 jobs by the end of 2002 and increased growth by 0.5 percent with growth projections ranging up to 4.0 percent for this quarter.

Why is it so crucial to point out the obvious? Because to those who see tax cuts for people who pay taxes as anathema, the obvious isn't.

Instead of crediting it with blunting the recession, tax cut opponents have alleged negative effects ranging from increasing interest rates, inflation and federal deficits to decreasing federal tax receipts.

Yet since the tax cut, interest rates have been historically low.

From May through December, the 10-year interest rate has averaged 5 percent vs. 6.16 percent from 1993-2000. Inflation has been similarly nonexistent. Since May, total CPI increased just 0.2 percent at an annual rate. Granted this was heavily influenced by falling oil prices but using the "core rate" (removing volatile food and energy components) and inflation was 2.6 percent for 2001 identical to the 1993-2000 rate.

Nor will federal tax receipts fall. As the economy recovers from recession from 2001 to 2002, the administration estimates tax receipts will grow 1 percent and continue growing by 5.5 percent in 2003, by 5.1 percent over 2003-2007, and that in each of the next 10 years total federal tax receipts as a share of the economy will be higher than the average over any 10-year period in U.S. history. Furthermore, it should be pointed out that despite charges to the contrary, last summer's tax cut made the tax code more progressive the highest income quintile's tax share will increase from 78.8 cents to 82.4 cents of every income tax dollar paid.

And federal deficits? Those who refuse to see the tax cut as the reason for a bolstered economy, equally overlook the war and recession when it comes to the federal budget. Rather than seeing surpluses as the effects of a strong economy that they are, the reverse is falsely premised. It is not surprising that in every war since 1812 and eight of the nine recessions since World War II that America has run a budget deficit. It is even less so now, when you consider that America has had to confront both. For this reason, the tax cut accounts for just 14 percent of the surplus reduction this year economic downturn and increased spending account for the remainder.

If current estimates hold up, the latest recession will have been the mildest on record. The economy will have declined just 0.3 percent as compared to 0.6 percent for the next mildest recession and the 2.2 percent post-World War II average decline in recessions. Is the current level of recovery sufficient? Of course not, and it will be stronger with the economic stimulus plan the president called for in effect. However, it is important to remember that without last summer's tax cut already in place, we might not now be talking about a recovery at all.


J.T. Young is a deputy assistant secretary at the Treasury Department.

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