FROM THE OFFICE OF PUBLIC AFFAIRS

Over the past 16 months, the U.S. economy has exhibited impressive resiliency in the face of a number of significant shocks: the tragic events of September 11th, the bursting of the 1990s equity bubble, the revelations of and repercussions deriving from major corporate financial scandals, a synchronized slump in global demand, and a rise in aversion to perceived and actual risks on the part of investors, business leaders, and households.  Although we now know that the US economy was contracting when President Bush took office, the recession was, by historical standards, brief and modest, and the economy has now grown for five consecutive quarters, at an average annual rate 2.7 percent. 

Economic recovery has been supported by a number of favorable fundamentals, including strong productivity growth – advancing a greater than a 4 percent pace during the recovery, low interest rates – recently at 40 year lows, and rising real after tax incomes – up 5.9 percent during 2002 thanks, in part, to the tax cuts that President Bush signed into law in 2001.
Yet, while the economy continues to grow, the road to recovery has been bumpy, with rapid growth in the first and third quarters of last year, and sluggish growth in the second and fourth quarters.  Moreover, the unemployment rate, which fell to 5.6 percent last summer, has recently increased to the 6 percent level first reached back in April. Although a growing economy with 6 percent unemployment might have been considered acceptable in previous business cycles, President Bush has said many times that he will not be satisfied until every American who wants a job has a job.

On January 7th, the President outlined a bold proposal that, if passed by the Congress, will help to insure that the recovery, now going through a soft patch, will not only continue, but will also accelerate its pace of growth and job creation.  Importantly, the President’s package also provides a solid foundation for future gains in living standards and prosperity, by tearing down obstacles in the tax code that slow growth and job creation.  The package will support consumer spending by accelerating to this year reductions in tax rates that under current law are scheduled to be phased-in in future years.  The package will promote productive investments by eliminating the double taxation of dividends, by raising the expensing limit for small firms to $75,000, and by lowering tax rates for small businesses, many millions of which pay taxes at the top individual rate.  Higher investment spending and continued growth in consumer spending will create jobs and lower the unemployment rate.  Ending the double taxation of dividends will lower the cost of capital to firms, will improve corporate governance, and will improve the allocation of investment thus boosting productivity.  At Treasury we estimate that by the end of 2004, real GDP will be about 2 percent higher and that the economy will generate almost 1-1/2 million more jobs with the package than without it.

While passage of the growth package will result in a modest deterioration in the Federal budget balance, most of the swing in the budget that has occurred to date – and that is projected to occur in the future – is due to the weak economy, the bursting of the equity bubble, and the pressing needs of national defense and homeland security.  As the President has emphasized, it is a growing economy that provides the opportunity to run surpluses, not the other way around.  Moreover, we believe that the estimates in the budget on the cost of the President’s program likely overstate the loss of tax revenues that will ultimately result if the program is passed.