Larry Kudlow

The red-hot Dow stock market index has run up to the 9,000 range, with no end in sight.

Just two weeks since the passage of President Bush's tax cut -- one that strengthens economic incentives by raising after-tax investment returns by over 40 percent -- the bellwether Dow has gained more than 400 points.

Once again, liberal negativists are being proven wrong. They were wrong when the economy quickly lifted off following the passage of the supply-side John F. Kennedy tax cut in the 1960s and the big Ronald Reagan tax-rate reductions in the 1980s. They were wrong again when a cut in the capital-gains tax rate powered technology investment in the second half of the 1990s.

And they are doomed to repeat their failed liberal thinking once more today.

The current stock market rally represents an impressive showing of the immediate impact of pro-growth tax cuts -- the same cuts that Democratic critics argued would provide no short-run benefits. All of the major indexes are up more than 20 percent since they began pricing-in the tax cut, and they are already recapitalizing American business.

Few people understand that the 11,000-odd publicly owned U.S. companies desperately needed a rising stock market to rebuild their credit quality and funding capabilities in order to expand operations, invest, produce more and hire new workers. In the last three years, capital and wealth were destroyed in the stock market, a development that caused a credit crunch, corporate contraction and a rise in unemployment. But the new tax cuts on personal incomes, investor dividends, capital gains and business equipment expensing -- along with a steady increase in the money supply and a waning of uncertainty -- are combining to give investors plenty of reasons to buy shares and replenish business capital.

Yes, there are millions of small companies that are privately held, and therefore might seem to be outside this recapitalizing and refunding process. But the credit improvement that the big fish enjoy will work down to the smaller fish. When attitudes toward big business improve, everyone in the lending community is in a better frame of mind. The lending will be there for the smaller firms, and also for the highest-risk start-up ventures that were shut down in recent years.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.