Many key economic indicators suggest the economy is returning to a growth trajectory. Perhaps the best leading indicator, the stock market, has expanded more than 20 percent since enactment of the 2003 tax cut, and corporate profits are up nearly 30 percent, as well. Also, manufacturing orders are rising, equipment and software purchases are up 7.5 percent, consumer spending remains strong and productivity gains continue unabated. But there are also some reasons for caution.
Although GDP growth reached 2.4 percent in the second quarter of this year, the private economy only grew at a rate of 1.3 percent. Thus, spending by the federal government accounted for much of the unexpected GDP growth. Another area pessimists have focused on has been the sudden rise in interest rates. The interest rate on 10-year Treasuries has increased from 3.1 percent in early June to over 4 percent today. Some of this sudden increase can be attributed to market expectations of further Fed monetary easing triggered by comments by Fed Chair Alan Greenspan - expectations that never materialized. That said, much of the growth in real interest rates is another sign of renewed economic vigor.
Nonetheless the Democratic presidential wannabes, in search of a winning issue, have been falling over one another to castigate Bush's economic policy. Their alternatives can be summed up very succinctly: higher taxes, more spending (on universal health care, education and just about everything else) and protectionism. The democratic candidates for president are in danger of remaking their party as the protectionist party. On free trade, Rep. Richard A. Gephardt said, "I am the one who not only voted against but led the fight against NAFTA and China free trade and Singapore and Chile." Sen. John Kerry, who supported free trade in the past, asserted that he would vote against a free-trade agreement covering the Western Hemisphere and promised that as president he would never sign a trade agreement that forces American workers to "rush to the bottom."
With opponents rushing that far to the left, the president need not join them with counterproductive initiatives. Instead, Bush can do some positive things immediately by staking his ground as the free-trade president he is by rescinding the steel tariffs and restrictions on soft timber, and reducing agricultural subsidies. He can also increase capital formation by proposing "expensing" legislation. Most importantly, by embracing National Enterprise Zones of Choice as a signature issue, Bush can provide incentives for individuals to live and build communities within the zones, reward economic dynamism and promote economic growth and opportunity as well as reduce disincentives people now face when undertaking productive activity.