It’s always amazing to listen to conventional demand-side economic pundits and mainstream reporters who try as hard as they can to minimize the excellent performance of the American economy ever since lower marginal tax-rate incentives were put into place almost two-and-a-half years ago. The latest chant is that a warm winter has artificially stimulated consumer spending, and that a day of reckoning marked by a housing-price crash and an overwhelming debt burden is headed our way. This is utter nonsense.
Apart from the inherent resiliency of our free-market capitalist economy, the fact remains that tax-induced capital cost reduction and resulting higher investment returns have boosted investment, healed business woes, and created employment growth near 2 million new jobs a year (and nearly 5 million since the middle of 2003 when the Bush tax cuts were implemented).
Unemployment sits at a low 4.8 percent today. Wages are perking up, with average hourly earnings rising 3.5 percent over the past year and 4.8 percent at an annual rate over the past three months -- their best performances since 2001. Importantly, falling gas prices at the pump are boosting real incomes enough that consumer spending is rolling ahead despite a slowdown in the housing sector and somewhat higher mortgage rates.
Of course, you can’t please the worrywarts. Yesterday they complained that wages weren’t rising; today they’re bellyaching that wage growth is too fast and that the Fed is going to have to tighten monetary policy much more in order to ward off cost-push inflation. This is more bogus Phillips-curve argument. But growth does not cause inflation.
Fortunately, new Federal Reserve chairman Ben Bernanke rebutted the Phillips-curve view in a recent speech at Princeton. Bernanke correctly argued that low inflation promotes economic growth and that strong economic growth is something to be desired, not shunned. The Fed chair cited Milton Friedman’s argument of nearly fifty years ago that inflation is a monetary phenomenon and not a function of too many people working or prospering.