Strong U.S. economy negates naysayers

Jack Kemp
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Posted: Dec 05, 2005 2:05 AM

In more than three decades of political involvement, I've never witnessed such pessimism, gloom and doom over the nation's economy emanating from people who should know better. If it's not Warren Buffett shorting the dollar because of trade and budget deficits, it's Fed Chairman Alan Greenspan bad-mouthing our economy at the G7 meeting in London and Congress failing to bring much-needed assistance to the Gulf Coast region because of wrangling over budget cuts and deficits. It's actually the antithesis of the real story of our economic resilience.

As investment strategist Brian Wesbury of Claymore Advisors wrote recently in The Wall Street Journal, "When bond yields rise, it is considered bad for the housing market and the consumer. But if bond yields fall and the yield curve narrows toward inversion, that is bad, too, because an inverted yield curve could signal a recession. If housing data weaken, as they did on Monday when existing home sales fell, well, that is a sign of a bursting housing bubble. If housing data strengthen, as they did on Tuesday when new home sales rose, that is negative because the Fed may raise rates further. If foreigners buy our bonds, we are not saving for ourselves. If foreigners do not buy our bonds, interest rates could rise. If wages go up, inflation is coming. If wages go down, the economy is in trouble."

I'm an optimist who doesn't worship at the shrine of balanced budgets, but I'm also realistic enough to know that the Titanic didn't stop just to take on ice.

The deficit is less than 3 percent of our economy's GDP, which is approaching $12.6 trillion. Unemployment is dropping, and while 5.1 percent is too high, it's going down, not up as in Europe. Core inflation, while too high, is less than 2 percent. The trade deficit that allegedly causes the dollar to fall has allowed the dollar to rise 10 percent in value versus the Euro this year alone.
The 10-year yield on T bills is well below the year 2000 yield of 6 percent, on average.

Problems abound post 9-11, post-Katrina and post-Detroit manufacturing slump, but with energy and health-care price increases among our challenges, let's not push a panic button and start raising tax rates or cutting social spending for low-income families and the poor.

David Gitlitz, chief economist of TrendMacrolytics, said recently that while it's gone unreported by the mainstream press, capital investment has been the fastest-growing segment of the economy. Revised third-quarter GDP numbers showed capital goods expenditures - for equipment and software - growing at a 10.8 percent annual rate. The Commerce Department recently reported that new orders for non-defense capital goods, excluding aircraft, rose by 1.3 percent in October, are up at an annual rate of more than 14.5 percent the last three months and have grown by 10.7 percent in the past year.

Spending in Washington is always to be constrained, and deficits do matter when they are purely monetized by the Fed or simply used to raise taxes on labor and capital, but this economy of ours is growing, our labor markets are flexible and our capital markets are the best in the world.

In "The World Is Flat," Thomas Friedman reminds us that globalization is good and markets are being created where there were none before. Capitalism is spreading in Eastern Europe, India, China and Russia, and I continue to believe political liberalization will ultimately follow. This is the history of post-World War II, and it can be the post-Cold War history if we don't lose our confidence or lose our way and become protectionist, isolationist and xenophobic.

The major cause of our 15 straight quarters of 3.5 percent-plus economic growth, almost 4 million new jobs and revenues rising 16 percent to 17 percent per annum is the lower tax rates on capital gains, dividends and the income of our people.
To raise capital gains tax by 33 percent and to raise taxes on dividends by 133 percent, as some are suggesting, is mindless economics, counterproductive and dangerous to the health of our economy.

 Economic growth is the only true way to meet the problems ahead. Where necessary, we must use public-private partnerships to aid the poor and enterprise zones to create urban jobs, spread entrepreneurship and job creation to the Gulf Coast region. We must unleash the homebuilders of America to help rebuild the housing stock of that region with incentives discussed by the president in his speech to the nation from New Orleans in September.

Congress, the chairman of the Fed and the opinion-makers of America need to show some confidence in the ability of our democratic-capitalistic economy to meet these challenges, and while they may be great, our response should be good pro-growth policies and faith in free markets, free people, free enterprise, free trade.