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The Bush Economy

By Karl Rove

(Note: The following remarks were delivered at the American Enterprise Institute in Washington, D.C.)

This morning I will focus my talk on the economy during the Bush presidency.

You may recall that when Governor Bush was President-elect Bush in December of 2000, he met with business leaders in America -- American business leaders in Austin. They told him, in effect, "Congratulations, you ran a fine campaign, and, oh, by the way, you'll be inheriting a hurting economy." Their prognosis in that day in Austin was grim, but they were right.

Order books were drying up, investment was falling, consumer confidence in purchases were dropping off sharply and markets were tanking.

The stock market began its decline in mid-January 2000, dropping from an all-time high of more than 11,700 in the Dow to below 9,800 in early March 2000, on its way to its first calendar year loss since 1994.

The bubble also burst in 2000. The Nasdaq, site of some of the largest IPOs in history, peaked on March 10th, 2000. And by December 2000, the time of our meeting in Austin, it had dropped by more than 50 percent.

The economy itself began slowing in the third quarter of 2000 as GDP declined by an annual rate of 0.5 percent. And all of this took place before George W. Bush set foot in the Oval Office.

The economy posted another decline in GDP growth in the first quarter of 2001: minus 0.5 percent. And March 2001 marked the recession's official start.

Sluggish growth of 1.2 percent followed in the second quarter of 2000. And GDP growth declined again in the third quarter, falling 1.4 percent.

As in past recessions, no one single factor caused the 2001 recession. It resulted from declining stock markets, a surge in energy prices, higher interest rates, and the collapse of the high- tech bubble.

Then, on a bright September morning, came the worst attack on the American homeland in our history. Al Qaida targeted our political and financial centers, and intended to bring our economy to its knees. That didn't happen, but serious damage was done. Airports were shut. Stock markets closed. The hospitality and the insurance industries hit especially hard.

The country suffered an estimated $100 billion in economic losses. And in the three months following 9/11, the American economy shed 1 million jobs.

That fall, a series of corporate scandals began to come to light. Among other things, these scandals led to the largest bankruptcy in U.S. history. Confidence in the markets was understandably shaken. And the Dow Jones dropped to below 7,300, a five-year low.

At the time, the Financial Times said, quote, "Forecasts of a Dow diving to 5,000, 3,000 and even below 1,000 have been receiving attention from investors who once could not believe the Dow would fall below 8,000."

A faltering economy, falling markets, shaken confidence, an economy reeling, that's what America's new president faced.

In times like these, the principles and values of a president come into play.

This president believes the government's role is to create an environment where the entrepreneurial spirit flourishes and where small businesses can grow, where people can dream about owning their own home and have it become a reality.

And he believes that economic growth is created largely on the economy's supply side. The best tax cuts create incentives for people to work and businesses to produce and companies to invest.

President Bush doesn't believe government creates wealth. He understands that's done by American workers, farmers and entrepreneurs.

His economic policies, then, are tied to a view of human beings that understands the role of incentives in shaping behavior. There are three important elements of these policies that I'd like to talk about today: the tax system, trade liberalization and budget discipline.

The president believes when the economy falters, tax cuts will lead to economic prosperity. This reflects a deep faith in individual citizens; in their energy and common sense and capacity to make wise decisions.

His view of free trade is grounded in the knowledge that American producers and workers can compete and win internationally as long as the rules are fair.

And an emphasis on a responsible federal budget reflects the president's belief that, while government should actively perform its core functions, it should not impede the efforts of individual citizens and enterprises to create jobs, wealth and economic opportunity.

Let me deal briefly with each one of these three: taxes, trade and spending.

In response to the economic challenges the country faced, President Bush provided Americans with the largest tax relief in a generation. With the help of the Republican Congress, he has secured the path to each of five major tax relief bills. He's led a successful effort to cut taxes every year he's been in offices. We've seen taxes cut on income, small businesses, dividends and capital gains. The child credit has been doubled, the marriage penalty has been reduced, and the death tax has been put on the road to extinction.

Taken together, these tax cuts have strengthened the economy, increased productivity and created new jobs. Just last week, in a major legislative achievement, Congress passed an extension of the capital gains and dividend tax cuts until the end of 2010, and a signing ceremony will take place on Wednesday.

An important point about the impact of the capital gains and dividend tax cuts: Between May 28th, 2003, when the president signed the legislation into law, and December 31st, 2005, the 500 leading U.S. companies on the S&P 500 have increased their dividend payments 725 times, and quarterly dividend payments averaged almost $47 billion a quarter. That is a 51 percent increase compared to the quarterly average for the 10 years previous to the tax cut.

That's money that is going into retirement funds and IRAs and people's pocketbooks.

President Bush's tax-cutting policies were not passed by unanimous consent. Some in Congress oppose any significant tax cut.

Indeed, some members of Congress predicted economic ruin if the president's tax relief was passed, any part of it. One critic called it, quote, "akin to arsenic poisoning for the economy."

Another said it was, quote, "nothing more than a sham wrapped in spin, shrouded with deception."

And a third said it, quote, "would bestow," quote, "no real benefits on most Americans."

Now, these aren't arguments. They're the political equivalent of schoolyard jeers. But more substantive points were raised in opposition.

One criticism was, quote, "the vast majority of its benefits were directed toward the wealthy," end quote.

If this were true, then logic tells you that the percentage of federal income taxes paid by the wealthy would be falling after the tax cuts. That is not the case.

The Bush tax cuts have shifted more of the burden onto the wealthy and those lower on the economic ladder have been relieved of a larger share of their tax burden.

The top 1 percent of the nation's earners, those making more than $317,000 a year, their share of income tax payments is up by 1.5 percent.

For the top 3 percent, those that have incomes are over $200,000, their share of the tax burden is up more than 5 percentage points, from 40.5 percent of the tax burden to 46.6 percent.

And the tax burden of the top 5 percent of those in America, those with incomes of lower than $141,000 a year, is up almost 3 percentage points.

According to the Wall Street Journal, for every 100 Americans today, the wealthiest three are paying taxes equivalent to the other 97 combined.

Another critic's claim is that, quote, "the tax cuts have played a major role in the return to deficits and debt."

The problem with this critique is it ignores that tax revenues are at an all-time high, in large measure because of the economic growth the tax cuts contributed to.

Last year, for example, revenues confounded the experts by surging $274 billion above forecasts. That's almost 15 percent.

And it is happening again this year. Last week, the Treasury Department's most recent survey shows that tax receipts were up by $137 billion, or more than 11 percent, for the first seven months of fiscal year 2006. Corporate income tax receipts were up nearly 30 percent. While individual income tax receipts have increased by 10 percent in what has been dubbed a, quote, "revenue tsunami."

If revenues for 2006 grow by 11 percent, then federal taxes will be equivalent to 18.4 percent of the economy; higher than the 40-year historical average.

In the words of the Wall Street Journal, this is, quote, "the largest two-year increase in tax revenue collections, after adjusting for inflation, that has ever been recorded."

The surge in revenues means that we are on track to achieve the president's goal of cutting the deficit in half by 2009. And it's worth noting that just the other day the CBO lowered its deficit forecast for this year, predicting that the large increase in tax revenues would cut the deficit to about 2.5 percent of GDP.

Another criticism, a strange one, of the tax cuts came from a former high-ranking Democrat official who dismissed the tax cuts by saying, quote, "We had very good markets in the '90s before all these tax cuts went into effect," end quote.

I'm not certain that most Americans would applaud returning to the end of 2000, when the Dow had just experienced its first calendar drop since 1994 and the Nasdaq had dropped by 50 percent a year.

It's not just that the critics predicted nearly the opposite of what happened after the tax cuts were passed. The president's critics were not only wrong, they could not have been more wrong.

Take the frequent claim that the president, quote, "failed to put forth a responsible economic plan to create jobs," end quote. We saw a lot of variations of this during the calendar year of 2004 but the charge is simply not true.

The American economy has created more jobs than all the countries in the Euro zone and Japan combined, and our economy is growing today faster than that of any major industrialized nation in the world.

It grew at an annual rate of 4.8 percent in the first quarter. It added more than 5.2 million jobs in the last two and a half years.

Employment is at near all-time high. Claims for unemployment insurance are at a five-year low. The unemployment rate is 4.7 percent; well below the average for each of the last three decades.

Core inflation remains low: just over 2.1 percent for the past 12 months. Mortgage interest rates remain near historic lows. And homeownership remains near a record high, with sales of new and existing homes reaching record levels in 2005.

Real disposable income has risen almost 14 percent since President Bush took office. The Dow Jones industrial average is near its all-time high. And since the 2003 tax cuts have been passed, asset values, including homes and stocks, have grown by $13 trillion.

The reality is that the tax cuts have helped make the American economy the strongest in the world.

A second component of the president's economic policy is free trade. President Bush believes trade is an important source of good jobs for our workers, higher growth for our economy, and bigger earnings for our farmers and our factories.

For example, exports accounting for roughly one-quarter of all U.S. economic growth in the '90s, and jobs in exporting plants pay wages that are up to an average of 18 percent higher than jobs in nonexporting plants.

Free trade has a proven record of creating new opportunities for our entrepreneurs, expanding choices for American consumers and raising living standards for all our families.

America is once again, under this president, in the business of promoting free and open trade, to build our prosperity and to spur economic growth.

Under the president's free trade agenda, the U.S. has completed 14 bilateral trade agreements since 2001.

And how important is it to expand economic freedom through free trade agreements? Our free trade partners represent 14 percent of the world's GDP, excluding the United States from the world total, and yet they represent 52 percent of all U.S. goods exports in 2005 -- 14 percent of the world but 52 percent of our economic exports.

Clearly, it is in our interests to tear down walls to the sale of American goods and services around the globe.

The third component of the president's economic policy is restraint of federal spending.

The president has reduced the growth of nonsecurity discretionary spending every year in office. In the final year of the previous administration, nonsecurity discretionary spending grew by 15 percent.

President Bush worked with Congress to cut that figure, reducing nonsecurity discretionary spending growth to 6 percent in FY '02, 5 percent in FY '03, 4 percent in FY '04 and 3 percent in FY '05.

For FY '06, the president worked with Congress to actually cut nonsecurity discretionary spending from the previous year's levels -- the first time since the Reagan administration -- and hold growth in total discretionary spending below the rate of inflation.

The president's FY '07 budget again proposes that nonsecurity discretionary spending growth receive an actual cut and that growth in discretionary spending again be held below inflation.

Now, how is this done? Well, take last year. The administration issued 39 veto threats on six major spending bills. And Congress responded to those veto threats by restraining spending to the levels proposed in the president's budget.

To put it mildly, the impact of the president's veto messages have been an unreported achievement.

Here's another fiscal fact people may be unfamiliar with: Under this president, federal spending as a percentage of the economy is lower than that under four of the last five presidents.

And the high water mark for the budget deficit as a percentage of the GDP for this administration -- 3.6 percent -- is significantly less than it was in the case of the 1980s, when it ranged as high as 6 percent.

The president's tax cuts, trade liberalization and spending restraint helped strengthen the economy's foundation and added fuel to our economic recovery; not a bad record.

The American economy still faces challenges, however, clearly. The first of 78 million baby boomers are beginning to retire. And by 2030, spending for Social Security, Medicare and Medicaid will comprise almost 60 percent of the federal budget. This is a serious threat to our fiscal well-being.

And while the topic of entitlements is beyond the scope of my prepared remarks this morning, I will point out that no president has made a more concerted or determined effort to reform Social Security, our nation's largest entitlement. The president encountered enormous resistance to what were bold but practical reforms.

I believe there will be a price to pay for the political intransigence which some showed to this reform agenda. But President Bush will continue to keep entitlement reform front and center on the nation's political agenda.

In closing, I suspect the temptation for some policymakers is to forget that beyond the economic statistics lie compelling human stories. This is a temptation that we must resist. We must remember that economic growth creates work which is the source of human dignity.

In his 1981 encyclical "On Human Work," John Paul II wrote, quote, "Human work is a key -- probably the essential key -- to the whole social question. Work is a fundamental dimension of man's existence on Earth. Work is a good thing for man, a good thing for his humanity because through work he achieves fulfillment as a human being."

This is an important reminder that prosperity is not just an end in and of itself. Prosperity is also a means to broader ends and greater purposes.

Things don't happen in Washington by accident. They happen because of the right policy and the right leadership. The American Enterprise Institute has done much to foster both.

And who knows? Maybe there is out there some young college student today reading an AEI study on telecom deregulation who will be inspired by the world of conservative ideas.

I was fortunate to have been in that position myself a long, long time ago.

I'm honored to have been invited today. Thank you for your attention.

Karl Rove is Deputy Chief of Staff and Senior Advisor to the President.

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