Investing wisely

ECONOMIC PROSPERITY prompts presidents to exaggerate their influence, while privation causes them to lament their impotence. So it was hardly surprising to hear President Bush emerge from his first Cabinet meeting of 2007 on Wednesday talking about “the need to keep this economy growing by making tax relief permanent.” Bush’s fondness for his first-term tax cuts, most of which are to expire in 2010, is well known. But if he and Congress want to keep the economy growing, they should shore up its foundation.

The economy enters the new year riding a couple of winning streaks. The U.S. gross domestic product has been growing for a record 20 consecutive quarters, and blue-chip companies in the Standard & Poor’s 500 have racked up 18 straight quarters of 10% or greater increases in profits. Those streaks began before the Bush tax cuts took full effect, though they have been abetted by the twin stimuli of the tax cuts and large increases in federal spending. “Making tax relief permanent” makes for a good political sound bite, but it hardly amounts to economic policy.

Nevertheless, there’s some grumbling about the prospects for 2007, particularly for those outside the executive suite. The deflation of the housing bubble continues, taking a toll on the residential construction industry and putting a damper on consumer spending. The long decline of the U.S. industrial sector, most evident in the auto industry, continues as well.

Yet the economy may be able to dodge those bullets. Housing sales crept upward at the end of the year. Moreover, with the decline in homebuilding, the price of materials has fallen, helping other construction sectors. At the same time, low interest rates, reduced energy prices and strength in other parts of the economy have led most forecasters to predict continued GDP growth in 2007.

Boosting the industrial sector is a harder task. Some Democrats on Capitol Hill, along with some liberal think tanks and advocacy groups, have raised the specter of protectionist trade policies and new rules to limit offshoring. When combined with higher barriers to immigration, they say, these policies would also help narrow the gap between the wealthiest Americans and everybody else. Such steps would be misguided, particularly at a time when the tightening labor market has finally started to drive up real wages.

In the long term, the best ways to improve wages are to create more highly skilled workers and provide a larger market for their talents. House Democratic leaders already have acknowledged this; when they unveiled their economic strategy in November 2005, one of the first three planks called for training more scientists and engineers and extending high-speed Internet access throughout the country.

In times of relative prosperity, Washington has the luxury of focusing more on the long term. Congressional Democrats should use this moment to promote policies that help more Americans share in the nation’s economic growth, not to advocate for a return to a less globalized, more protectionist era. Bush, for his part, should be looking for ways to minimize the effect of the tax code on the economy, not embellishing its effect.