The supply-side trajectory is from tax cuts to investment funding to jobs. The Bush tax cuts relieved the double and triple taxation of investment, and today the jobless recovery is over. This year alone, we're on track to create 2.6 million new jobs. Not even uncertainties over the war on terrorism have been able to smother the cascading tide of job-creating investment funding at lower tax rates and higher after-tax returns.
By the way, lower taxes are also counter-inflationary. If inflation is classically defined as too much money chasing too few goods, then the wave of goods production unleashed by new tax incentives will absorb new money created by the Federal Reserve, thus preventing any outbursts of inflation.
The Fed will move to normalize its base policy rate in the months ahead, as it should. An emergency 1 percent fed funds rate is no longer necessary. Meanwhile, the combination of lower taxes, record productivity and more rapid economic growth will keep inflation in a manageable 2 percent zone.
The Congressional Budget Office predicts a mere 2.8 percent annual growth rate of GDP in the years ahead. This phony baseline misses all of the supply-side points. At 3.2 percent productivity gains, with a normal 1.5 percent yearly rise in population growth, the U.S. economy's potential to grow is rising above 4.5 percent a year. At this rate, budget deficits will evaporate rapidly as the economy quickly marches toward full employment.
According to an internal OMB document published by The Washington Post, the administration is making a new push for spending restraints in next year's budget, which will help leverage economic growth into faster deficit reduction. Timely vetoes of the pork-barrel highway bill and a defense appropriation that fails to close unnecessary military bases in the United States would also send a strong deficit-cutting message.
The tax-cut-driven Bush boom has legs. It is no onetime event. It will maintain strong growth at low inflation for years to come. And it will send an important signal to our terrorist adversaries: We'll have ample resources to guarantee your defeat. Reagan sent the same message to the former Soviet Union when he cut taxes in the Cold War 1980s. It's exactly the right message. Bush is sending it loud and clear.