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Lovell editorial: Don’t believe the hype: tax cuts are good for you


Having lost the national debate, the Iowa members of the anti-tax cut establishment are gearing up to squash any hope of local relief. How embarrassing for them that the stock market doesn’t agree with their position.

The Nasdaq Stock Market last week touched a one-year high. The Dow Jones Industrial Average has soared over the past month and is now in positive territory for the year.

Some of the gains can be credited to hopes for an improving economy and continuing resolve in the war against terrorism. We argue that the more basic and powerful explanation is President Bush’s tax cut.

The stock market is the single best barometer of investor confidence in the U.S. economy. The most recent rally came despite recession and a falling dollar abroad. It’s encouraging, to say the least.

If you’re wondering how the stock market applies to you, here’s an example: insurance premiums have been skyrocketing over the past two years, largely because of stock market losses. That’s one example of dozens.

Those who put their faith in big government continue to spout the tired line that tax cuts don’t boost the economy. They point to the $300 checks that most Americans received in the fall of 2001, and their subsequent failure to kick-start the economy, as evidence that lower taxes don’t work. They have also (recently) questioned why Iowa’s economy isn’t humming based on tax reductions enacted in the late 1990s.

There are several problems with those arguments.

First, Iowa’s economy just isn’t in that bad of shape. Unemployment has risen, but the state’s jobless rate is still miles below the national average. Companies in the financial services and insurance sectors are doing fine.

Earnings at most of Iowa’s publicly traded companies are rising. Sales of homes, presumably the best indicator of consumers’ confidence in their economic prospects, are as strong as they’ve ever been.

Relative to states whose governments gorged on late-1990s bubble-economy tax receipts, such as New York, Illinois and California, Iowa’s economy is humming.

Next, we don’t know what would have happened to the post 9/11 economy without those $300 checks. It’s probable that the brief recession would have been much worse. Lastly, the checks were a one-time event, and thus did little to provide a long-term stimulus.

This last item is the point worth remembering. Permanent tax cuts work because they let businesses and households adjust their spending and investment behavior permanently.

The power of this response can’t be emphasized enough. What would you do if you could count on an extra $100 in your paycheck, compliments of lowered taxes?

You might spend the $100 immediately. You might save it, or you might spend more than $100 straight away, encouraged that the extra money would still be coming a year from now. That money flows back into the economy, boosting employment and eventually flows back to the government.

Consumer spending makes up two-thirds of the U.S. economy.

Government spending can spur growth. One example is a story in this issue that details how the recent completion of Highway 5 has boosted the number of homes in Warren County and given Polk county’s southern neighbor a growing retail district.

Devout Keynesians ought to be cautioned by memories of government’s failure to stanch the crushing malaise and hyperinflation of the 1970s. Public spending has done nothing to help modern Japan.

They also ought to recall that the booming 1960s and 1980s were largely the result of lasting tax cuts promoted by Presidents John F. Kennedy and Ronald Reagan.

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