The economy is performing like gangbusters. In November manufacturing had its best month in 20 years, construction activity rose to its highest level on record and last week the unemployment rate fell below 6 percent. Disposable income increased almost 6 percent last year, and the stock market has added $2 trillion to the nation's balance sheet since the beginning of the year. Worker productivity is rising at a blistering 9-percent pace, which helped fuel the overall economy in the third quarter to grow at the fastest annual rate in two decades.
There is no doubt that the primary impetus for this growth is the Bush tax rate reductions, which have taken the shackles off the economic recovery. Moreover, economic policy took a turn for the better last week when President Bush rescinded his earlier ill-advised increase of steel tariffs, which should lower prices on everything made of steel and create additional economic momentum. My hope is that the president now will go further and take the tariffs off steel completely and - while he's at it - reduce the farm subsidies that are hurting American consumers and Third World countries, particularly in Africa and other nations that want to increase the amount of agricultural products sold in the United States.
With all of this good economic news, it is only a matter of time before the Keynesian outcry begins: "Too much growth! The economy is overheating and creating inflation." They will blame the inflation on a rising deficit and say taxes should be raised to reduce the deficit and lower inflationary pressures. As sure as the sun rises in the east, they will say it, and just as surely as the sun sets in the west, they will be wrong.
The sole cause of inflation is the Fed's recklessly buying bonds and pumping too much liquidity into the economy, pushing prices higher and wages lower, temporarily fooling producers into believing demand is higher than it really is. Budget deficits result from recession and undisciplined government spending, which displaces private investment and places a drag on economic growth. Inflation is the outcome only if the Fed attempts to counteract that drag and pump up growth artificially by injecting too much liquidity into the economy.