Bush's inflation-free boom

Larry Kudlow
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Posted: Dec 18, 2003 12:00 AM

The latest batch of government economic data reveals a new theme: inflation-free boom. It's a business-led scenario this country hasn't seen in many years, and it could mean another 8-to-10-year prosperity cycle is on the way.

Illustrating the renaissance in American business investment and production, the S&P industrials sub-index has gained nearly 10 percent just since September. The November industrial-production report published by the Federal Reserve Board surged spectacularly above expectations, while production figures for the prior two months were revised upward. Since August, industrial production has grown at an outsized 7.8 percent annual rate.

But here's a critical revelation within the new data. Computer and office equipment has surged 32.6 percent, and the high-tech index of computers, communications equipment and semiconductors has exploded at a 50.7 percent annual pace. Did someone say capital expenditures? Yes. Capex is back. So is tech. Tanned, rested and ready.

New high-tech applications, funded by a resurgence of business investment, are setting the stage for a powerful new economic growth surge. In the process, record productivity is producing record profits. As a result, profits, jobs and incomes will surprise everybody on the upside next year.

While retail sales over the past three months have temporarily slowed to a 2.1 percent yearly pace (following a 6.6 percent surge in the third quarter), production has moved ahead roughly three times faster. America is now producing more rapidly than it is consuming. Supply is growing faster than demand.

So inflation remains nonexistent. The consumer price index actually fell slightly in November, and over the past 12 months the core CPI has increased only 1.1 percent, the smallest gain in 38 years. The chain-weighted core CPI, a more accurate measure, as it frequently adjusts a basket of prices to reflect shifting consumer preferences, has increased only 0.6 percent over the past year -- a trifle.

In effect, America's businesses are producing at a torrid 8 percent rate without generating any inflation. Keynesian demand-siders who believe that growth causes inflation should take their models out behind the barn and shoot them. As profits and production continue to rise, more jobs and higher worker incomes will spur a new round of consumer spending this winter and spring. Supply creates its own demand.

Bush administration supply-siders who argued in favor of permanent tax incentives to grow the investment side of the economy are being proven exactly right. Former top Bush economist Glen Hubbard -- one of the principal authors of last May's growth bill that lowered Uncle Sam's tax bite on investment by roughly 40 percent -- deserves loud kudos. Liberal columnist Paul Krugman, who opposes supply-side tax cuts at every turn, deserves a resounding Bronx cheer.

Both the economy and the stock market (the Dow has moved past 10,000, and the S&P is up 23 percent on the year) are voting for President Bush. The dramatic capture of Saddam Hussein, an event that punctuates steady progress in the war, is another huge plus for Bush's re-election bid. Contrary to the fantasies of Gov. Howard Dean, the latest Wall Street Journal-NBC opinion survey shows that a solid majority of Americans -- 62 percent to 32 percent -- believe the war in Iraq has made the United States safer and more secure.

This growing psychology of safety and security will translate to greater economic risk-taking and more far-reaching investment in the domestic economy. That, in turn, will drive up stock prices and grow the economy even more rapidly.

The Bush combination of lower tax rates to ignite economic recovery at home and a determined policy to inflict punishment on our enemies abroad is almost exactly the same as Ronald Reagan's program two decades ago. In each case, peace and prosperity were achieved.

And once again, they'll be sustained. With Bush the likely victor next November, there will be no economy-wrecking Democratic tax hikes in 2005 or thereafter. Instead, the success of Bush's bold economic and foreign policies in his first term will open the door to more growth initiatives in his second.

The potential for a major expansion of tax-free savings accounts, privately invested Social Security choices, across-the-board corporate tax reform, an end to frivolous anti-business lawsuits, and free-trade agreements in Central and South America will all be possible in a second Bush term. And the Iraqi beachhead for representative government, human rights and market economics will transform Middle Eastern politics and spread to other dark corners of the world.

Good policies always lead to good politics at home and abroad. While this is not a new thought, once again events are proving it to be a timeless and universal one.