The recession is over - and that's bad news to tax-cut foes

December 24, 2003|By Alison Fraser

WASHINGTON - There's bad news: The economy is booming.

Bad news, that is, for those who have continued to insist, in the face of mounting evidence to the contrary, that the tax cuts approved earlier this year aren't working. The critics are running out of negative spin.

For example, when the news came last month that economic growth in the third quarter of the year had surged to 8.2 percent - the best growth we've seen in nearly 20 years - they had a ready retort: It's a "jobless recovery."

Not anymore. Are we where we should be? No. But we're moving there at a remarkable pace. More jobs are available, and fewer people are in the unemployment lines. And the evidence indicates that this crop of good news promises solid economic growth throughout next year and likely the year after that. The recession is finally behind us. And now, fortunately, so is the slow growth that has marked the recent recovery.

Job growth has increased over the last four months, and we've added 328,000 new jobs to the economy. In related good news, the unemployment rate has slipped to 5.9 percent, erasing the poor performance of the last year.

What's significant about these figures is their signal that the economy is not merely poised for recovery, but in the midst of it. Job growth is usually the last patch in the economic recovery quilt. These patches now all appear to be in place. With few exceptions, economic indicators are up across the board.

Indeed, the stellar growth of last quarter outpaced the expectations of even the most optimistic forecasters. Three sources of growth in particular show why the recovery is structurally sound and why we can expect continued growth.

Business investment. It's grown significantly in the last six months and at an especially good clip in the last three months, which means that a crucial part of the economy is picking up steam. Businesses don't invest in equipment unless they plan on producing more, and in order to do that, they need more people. This is a critical signal that businesses are more confident and that they believe they can increase their activities without undue risk.

Business activity. It's on the rise for the manufacturing sector as well as the service sector. Manufacturing activity is at its highest levels in 20 years, with new orders and production soaring. The performance of both sectors indicates the recovery is well under way and sustainable.

Business productivity. Productivity grew 9.4 percent in the third quarter, more than twice the normal growth rate. But there is even more good news: Month after month, productivity gains are accompanied by signs of life on the employment side.

While consumer spending has done much to sustain the economy throughout the recovery, business investment, activity and productivity are what cause job growth, and these missing links now appear to be in place.

What about manufacturing jobs? Unfortunately, they continue to languish, with a drop in November of 17,000 jobs. But this is nothing new. Manufacturing jobs have been declining for a generation, but our economy has not come to the screeching halt some predicted.

Instead, better-paying jobs in the service sector, which includes everything from financial, banking, health and legal services to retail and construction, have replaced manufacturing jobs. This may not offer much comfort for those in manufacturing, but the fact is that our economy has evolved structurally just as it did between 1890 and 1920, when we moved from an agricultural economy to a manufacturing one. Jobs in this new framework are more knowledge-based, offer higher wages and provide more freedom to climb the ladder of economic prosperity.

One question remains: Why are we getting this good news now?

Many factors are involved, of course, but critics cannot ignore the fact that the tax cuts are working. They built a foundation for bringing the recovery full swing by providing incentives for businesses to expand and invest. Tax relief has lowered the cost of capital and made existing enterprises more profitable and investment and expansion more attractive.

As the economy continues to grow and expand, we can almost certainly expect to experience even stronger jumps in employment (especially if we make the tax cuts permanent). That may be bad news for those who earn their living by opposing tax cuts and other pro-growth strategies, but it's definitely good news for the rest of us.

Alison Fraser is director of the Roe Institute for Economic Policy Studies at the Heritage Foundation.

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