Thursday, July 14, 2005

Once Again, the Laffer Curve is Working

Larry Kudlow over at RCP. It's really fantastic commentary.

have long believed that stock indexes reflect the health, wealth, and security of individual nations. That explains why stock markets are standing tough in the face of al Qaeda’s latest attack. Worldwide investors are telling the enemy they have long-term confidence that the war on terror will be won, just as they believe in the resiliency and flexibility of free-market economies and the outlook for pro-growth policies, which are in action across nations.

Ben Bernanke, the former Fed governor and new chairman of the Council of Economic Advisors, told a Washington group that “We are in the midst of a healthy and sustainable economic expansion.” He’s got that dead right. Besides rising share prices, appreciating real estate and declining unemployment are boosting family wealth and incomes, allowing consumers to withstand higher energy prices. Meanwhile, sales at stores open at least a year are surging at better than 5 percent; corporate profits, which are the lifeblood of business expansion and investor class wealth, have soared to record shares of gross domestic product; and recent surveys by the Institute for Supply Management show both the manufacturing and service economies to be strong.

Though President Bush’s critics will never admit it, his supply-side tax reforms of two years ago are working brilliantly. With new incentives to work and invest, the economy is expanding, the income base is widening, and businesses and individuals are producing an unprecedented surge of tax collections. All this is occurring at lower marginal tax rates. Once again, the Laffer curve is working.

The budget deficit is shrinking to roughly 2.5 percent of GDP in line with the average of the past four decades. As for the claim that trade deficits are bad for U.S. workers, consider this thought from CafĂ© Hayek blogger Russell Roberts, a professor at George Mason University: “The U.S. has run a merchandise trade deficit for every year since 1976, trillions of dollars of deficits. And since 1976, the U.S. economy has created over 50 million jobs.”