Academic journal article Business Economics

Economic Outlook and Economic Policy in the United States: The Administration's Tax Cut Proposals Will Strengthen Short-Term and Long-Term Growth

Academic journal article Business Economics

Economic Outlook and Economic Policy in the United States: The Administration's Tax Cut Proposals Will Strengthen Short-Term and Long-Term Growth

Article excerpt

The current recovery remains vulnerable, with unusually weak investment and job creation for the recovery phase of a cycle. The Administration's tax proposal mitigates risk of weak short-term growth while enhancing long-term growth. Of particular note for the long run is the reduction of the cost of capital to business by reducing double taxation of corporate earnings - a tax whose burden falls heavily on workers. Effects of the tax plan on federal deficits will not be substantial enough to place a long-term burden on the economy.


The events of the past two years have brought new challenges for the U.S. economy and for America's economic policy. Efforts to strengthen homeland security and prosecute the war against terrorism placed new demands on the economy. The recovery from the 2000-2001 economic slowdown continues, but with an unsatisfactory pace of job creation. These developments make it all the more important to undertake policies that promote growth, both in the United States and in the global economy.

In many ways, the economy's recent behavior has been different from that of past recoveries. Typically, business investment declines most sharply in recessions and expands most briskly in recoveries. By contrast, spending by the household and government sectors do not fluctuate as much. in 2002, however, the recovery from the economic contraction in the previous year took place amid continued weakness in business investment and strength in the household sector. Weakness in investment, in turn, has reduced job growth below what is normal for this stage of the expansion. In the near term, the central challenge for the economy will be to support rising investment, so that robust job growth can resume.

Over longer horizons, the fundamental strengths of the American economy are clear. Most importantly, the productivity acceleration that began in the late 1990s continued in 2002. The trend rate of U.S. labor productivity growth has risen from 1.4 percent per year from 1973 to 1995 to 2.5 percent per year from 1995 to 2000. Over the last four quarters for which we have data, labor productivity has risen by 5.6 percent--the best four-quarter change in productivity since the early 1970s. Because productivity growth is the key to growth in incomes and living standards, the ongoing productivity revival speaks well for the long-term outlook. Additionally, inflation remains low and stable, which helps the economy interpret relative price signals efficiently and which gives policymakers the room to support near-term growth.

The role of business investment in the current recovery and the importance of productivity growth in the long run provide the context for President George W. Bush's jobs and growth proposals. In the short term, the focused, specific proposals that the President has outlined are the most appropriate way to insure that the investment recovery proceeds as expected. In the long run, the proposals will raise living standards by increasing investment and the capital stock, which will make workers more productive and thereby raise their standard of living. Before I turn to those proposals, I will review the recent performance of the U.S. economy. Doing so will illustrate how the Bush Administration's proposals support the immediate recovery as well as improve incentives for long-term growth.

The Economic Situation

Most discussions of the economic outlook in the United States (and, for that matter, the global economic outlook) center on the 2003 military conflict in Iraq. From a U.S. perspective, there is little doubt that uncertainty over the timing, duration, and scope of hostilities prior to the invasion of Iraq by the United States and its allies weakened the momentum of business investment and job creation. Some economists and officials have argued that resolution of the conflict removes the headwind restraining the economy's momentum, making additional monetary or fiscal policy action unnecessary. …

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