The silence of the Bush Boom

Larry Kudlow
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Posted: Aug 17, 2005 12:00 AM
Why President Bush seemingly gets no credit for the strong economy is one of the enduring political mysteries of our time. Some call it the “Goldilocks economy” -- a term widely used to describe the low-inflation growth of the second half of the 1990s. More accurately, it’s a non-inflationary boom where the economy is hitting on all cylinders and the outlook for the coming years is bright. In view of the ravages of the 2000-02 stock market plunge, the 9/11 terrorist attacks, and skyrocketing energy prices, the Bush boom stands as even more of a great achievement.

But still he gets no credit. Most polls show the president’s economic approval rating around 40 percent or even less. Scott Rasmussen, who does extensive consumer and investor polling, shows that the confidence ratings of both are about 15 percent lower than in late 2003.

Meanwhile, a splendid group of economic data points show clearly the effectiveness of the president’s marginal tax-rate reductions of two years ago. The tax-cut package was in large part directed at stock market and business capital formation, both hard hit a few years back. This was the correct target. Share prices have recovered about 70 percent in recent years, with a number of widely tracked indexes, like the NYSE and the S&P small- and mid-cap indexes, now trading at all-time highs. The economy itself is growing at about 4 percent per annum since the tax cuts, with business investment leading the surge.

Breaking down the major components of the economy, business spending on equipment and software is now contributing close to 30 percent of the increase in gross domestic product. (Prior to the Bush tax cuts on capital gains, dividends, and personal incomes, cap-ex was a net drag on economic growth.) The business surge has caused industrial production to rise by nearly 9 percent in the past couple of years, or 4.1 percent annually.

In this supply-side model, it is investment and production that create jobs. Not surprisingly, the total U.S. employment of 142 million workers stands at an all-time high. Since May 2003, non-farm payrolls have grown by 4 million, while the Labor Department’s household survey (which includes the self-employed) has surged by 4.5 million. The unemployment rate is 5 percent with real worker compensation growing by nearly 4 percent. Interest rates and core inflation are running at four-decade lows.

Liberal economists like Paul Krugman ridicule the Bush boom as nothing more than a housing bubble destined to burst. But if the numbers-challenged Krugman would do some homework he would find that the GDP contribution of residential investment has dropped from 15 to 8 percent in the last two years. For that matter, the consumer contribution to GDP has slowed from 90 to 75 percent. By taxing investment less, the economy is generating more of it.

With comparable economic numbers in 1983 and 1984, President Reagan enjoyed a tremendous “morning in America” popularity that won him a 49 state landslide. Similarly, the economic boom of the late 1990s helped President Clinton withstand the political slings and arrows of impeachment. But for some reason this economy is not working for Bush.

Most pundits blame rising gas prices and Iraqi war difficulties for Bush’s slump. While these are involved, they’re not the whole story. The unwillingness of the Bushies to communicate and market an economic-recovery message is also to blame.

Politics is a lot like 12-step programs, where recovery comes through daily repetition. But on the Friday of an unexpected 207,000 jobs increase, President Bush was nowhere to be seen. Instead of a 10 a.m. news briefing in Crawford, Texas, the news vacuum was filled by blathering Wall Street pundits who turned good news on jobs into bad news on rate-hikes from the Fed. Bush did mention jobs in his radio address the next day, but who in steamy mid-August was listening?

This is the basic marketing problem of our MBA president.

Another possible sub-rosa problem plaguing the administration is the growing public distaste for wasteful federal spending. While the highway and energy bills both had positive elements, both the mainstream and conservative media used each as examples of pork-barrel politics. Adding to this, two-thirds of respondents to a recent CNBC poll favored lower spending

and taxing, whereas only 4 percent approved of tax cuts alone. Another 30 percent favored government budget cuts alone.

The 2003 tax cuts were clearly an economic elixir, but the American public may well be growing uneasy with the failure of Washington to better manage taxpayer money. At the same time, the drumbeat of the economic pessimists in the media may only be exacerbating the problem.

Bush has a good story to tell, but he must tell it. Then he must add a chapter on new spending restraint. If the president and his high command can make these kinds of adjustments, they can move the economic polls up where they belong.