Hands off is best economic policy

Posted: Dec 09, 2006 12:01 AM
Hands off is best economic policy

WASHINGTON -- You rarely heard the words "economic growth" in the Democrats' campaign rhetoric this year. That's because there was little, if anything, in their agenda to promote it.

Liberal "economic populism" has become the Democrats' mantra, a vaguely defined retro term that calls for higher taxes on businesses and the people who save and invest, reregulation of the economy, mandated wage levels and protectionist tariffs that would raise consumer prices here and lead to retaliatory trade barriers abroad.

But this is no time to be imposing new taxes, regulatory straitjackets and counterproductive trade restrictions on an economy that, despite its slowdown, is fundamentally strong.

Unemployment remained in the mid-4-percent range, and the nation's gross domestic product (the chief measure of U.S. economic growth) has been averaging 3 percent over the past 20 quarters.

While manufacturing dipped in the past several months, and is due for an upturn in the new year as the global economy continues to expand, the larger services sector has been thriving. (And producing most of the new jobs.)

"Services output is growing strongly, as indicated by the latest 58.9 reading for non-manufacturing ISM index (which includes construction). While the market's emphasis has been on the weakness in manufacturing, services, with a much larger share of GDP, continue to suggest solid growth," said David Malpass, chief global economist at Bear Stearns.

With wages growing nicely in a "full employment" economy, consumption has been "growing steadily since the 2005 Katrina fluctuation," Malpass adds. He expects consumption growth to "remain solid into 2007, drawing on the low unemployment rate, good lifetime earnings prospects and the high level of household financial savings (more than the rest of the world combined)." Consumer spending accounts for two-thirds of the entire U.S. economy, and the trend lines are all pointing upward in this key sector. If the current pace holds, consumption could rise by a strong 3.5 percent annual basis in the fourth quarter.

That's not the worldview one hears coming from the bears on Wall Street and in academia who have been sounding the dreaded "r-word," forecasting a recession for 2007 and almost hoping for the dramatic economic crash they've been predicting in the past year.

But I think the pessimistic practitioners of gloom and doom will be proven wrong once again, as they have been throughout 2006.

Housing remains in a slump because of a combination of factors: increased mortgage rates earlier in the year, a belief among prospective homebuyers that falling housing prices will decline further and the sheer exhaustion of the housing market from its furious sales pace in the past two or three years. But this decline is likely to hit bottom early next year. Indeed, we have already been seeing tentative signals of that, as existing home sales have crept up lately in places and mortgage rates have fallen a bit, too. Malpass thinks "the housing slump should begin to stabilize, but at a reduced level, after the first quarter."

This is not to dismiss the gradual slowing down of our economy as we enter a self-correcting period after the furious growth spurt of the past three years. The economy was expanding at a robust 5.6 percent growth rate in the first quarter, slowed to 2.6 percent in the second quarter and slowed a bit more to 2.2 percent in the third. Fourth-quarter growth will be around 2 percent, signaling the economy is still growing as it heads into calmer waters in the new year.

Meantime, Wall Street has been signaling increasing confidence in the economy based on strong corporate earnings and the hope that the Fed might even cut interest rates in the short term.

The Commerce Department's Bureau of Economic Analysis' estimate of corporate profits for the third quarter showed a 30.9 percent increase over the third quarter of 2005. That's the kind of growth the stock markets love and another sign the economy is still running on all cylinders.

That's why the Dow Jones Industrial Average was in the 12,300 range last week, swelling worker 401(k) retirement accounts and boosting federal revenue that has sharply reduced the budget deficit.

But all this will be endangered next year if the new Democratic majority in Congress seeks higher tax rates, draconian regulations on business and a reversal of free-trade policies.

Just the opposite is needed: lower tax rates on income and investing, further deregulation of our economy, including oil and gas exploration in the Gulf, and expanded trade agreements to open new markets for U.S.-made goods and services. These issues are going to be at the forefront of congressional debate next year. Let's hope the advocates of entrepreneurial opportunity, growth and wealth-creation win.