November 30, 2005
Smart or Stupid?
By Lawrence
Kudlow
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?
Lawrence
Kudlow is a former Reagan economic advisor, a syndicated columnist,
and the co-host of CNBC's Kudlow
& Company. Visit
his blog, Kudlow's Money
Politics.
