Timing is everything in life. The first Bush tax cut passed in 2001 was not slated to become completely effective until 2006. As a result, investment decisions were delayed. Apart from a temporary consumer spending spurt from short-lived tax rebates, economic recovery was stalled.
But this year's tax cut became effective almost immediately -- beginning in May for investment and July for lower tax withholding rates on income. Immediate tax cuts produced an immediate change in economic behavior. Investment decisions on the back burner were quickly put on the front burner. And the economy immediately picked up.
The recent rise in long-term Treasury-bond yields was induced by the economic recovery and signaled that Fed easing moves had come to an end. Americans acted on this information. Those who delayed investment plans on the hope that financing costs would sink further suddenly shifted gears and started investing in order to beat still higher interest rates in the future.
Give credit to President Bush for his unrelenting pursuit of pro-growth tax incentives. Also tip your hat to House Ways and Means chair Bill Thomas, who crafted supply-side tax-cut legislation against all odds.
Just as last spring's stock market began predicting a business recovery, unexpected business strength this summer turned the market forecast into the real thing. Job creation will now fall into place. Stock market multiples will continue to expand. Animal spirits will keep rising. Entrepreneurship will gather force.
The only people who don't get this are the nine Democrats running for president. They have presented a relentless vision of pessimism that is at loggerheads with both the American spirit and the new economic reality. Their platform of tax-cut repeal is a platform of prosperity rollback. It won't work. Pessimism never does.