Smart, or Stupid?

Larry Kudlow
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Posted: Nov 30, 2005 10:05 AM
Will someone please explain why the Bush White House and the Republican Congress are not trumpeting this economic boom on a daily basis? Their polls are sagging, but the economy is soaring. This simply shouldn’t be.

If former President Clinton had overseen this economy, he’d have held daily Rose Garden news conferences to mark the occasion. In fact, former President Reagan did just that in the booming 1980s -- he gave speech after speech touting the success of his supply-side tax cuts. Yet President Bush seldom goes into the current economic story, and when he does it’s just a mention.

Why the silence? Even the media can’t keep mum about this economy: “Consumer confidence is up as gas prices drop.” “New home sales hit record levels in October.” Business capital spending is strong across the board. Core retail sales are surging.

The recovery narrative is not new, but hardly a day passes without the arrival of more positive economic data.

Real GDP has grown at 3 percent or better for ten straight quarters, averaging 4.1 percent at an annual rate for the best performance since the middle 1980s. Wall Street expects the good times to continue, with a consensus of economists predicting 4 percent growth for this year’s fourth quarter.

Business profits have increased at a double-digit pace for nine straight quarters, only the third time this has happened in 55 years. At 8 percent of GDP, after-tax earnings are at a record high. Ditto for household net worth and total U.S. employment. In fact, average monthly job creation over the past two years is running at 179,000, more than five times the GM layoff total.

The source of this good fortune is clear: American businesses, the backbone of our economy, have responded to tax incentives that sharply reduced the cost of capital. Capital spending expanded at 13 percent last year, the best performance in two decades. This year’s tally should be even larger, meaning more jobs and higher incomes.

Actually, the business story is larger than life. With record profits and cash flows, businesses are now paying out record dividends and share-buyback capital gains, while at the same time investing heavily in new plant, equipment, and technology. This good news hits home. At lower tax rates on dividends and capital gains, 57 million equity-owning families will have the option of reinvesting their new cash or spending it. The economy benefits either way.

Inside the business boom is the productivity revolution of the Google/Internet economy, where output per hour has grown at a 3 percent yearly rate for 10 years. Cynics derided the Internet revolution when the bubble burst 5 years ago. But it turns out that the Internet survivors are now huge influences on the communication platforms, information content, and distribution channels that are remaking the way businesses and families live and work.

True, inflation has worried many in recent months. Nevertheless, core inflation remains tame and interest rates are at four-decade lows. The recent gold rally suggests that the Fed has a few more rate hikes in store, but as the Dow Jones approaches 11,000, stock markets are predicting an imminent end to the Fed tightening cycle. Meanwhile, bond market indicators suggest that future inflation over the next 5 to 10 years will be just as tepid as core inflation is today.

Perhaps one of the biggest economic surprises is the U.S. greenback, which has regained its strength in the currency markets. This isn’t simply because American interest rates have risen with the economic cycle. It’s mainly because the U.S. economy is throwing off high investment returns that attract foreign capital from around the globe (where free-market capitalism, by the way, continues to spread at a breathtaking pace).

With Congress moving toward new budget restraints, the fiscal year 2006 budget gap may well come in below last year’s deficit, even with the new Katrina spending. This is a function of a healthy economy that has been throwing off tax-revenue surprises ever since lower tax rates were put in place two years ago. So the question is: Why would any Republican member of Congress want to upset this abundant economic applecart?

Under current policies the economic boom can last for many more years. Hence, the after-tax rewards for work, investment, and risk taking that are so essential to this prosperity should be renewed and extended without a second thought. The GOP should also launch a new round of pro-growth tax reform to flatten tax rates, broaden the income base, and vastly simplify the dreaded IRS tax code.

Republicans in Congress must strike while the iron is hot, adding to pro-growth policies and expanding their economic-growth coalition. There’s really only one question a GOP lawmaker can be asked these days: You gonna be smart, or stupid?