Despite the Gloom, More Bush Boom

By Lawrence Kudlow
Thursday, November 1, 2007

If things are so bad, why are they so good?

With all the gloom coming out of Wall Street, the Democrats on the campaign trail and the mainstream media, a remarkable thing just happened: Real gross domestic product, the best summary report of the American economy, came in at a breathtaking 3.9 percent annual rate for the third quarter. In fact, following the 3.8 percent growth rate for the second quarter, the U.S. economy has posted its strongest quarterly growth in four years. The economy actually appears to be speeding up, following the relatively sluggish performance of the prior 18 months.

On top of this, the inflation rate is actually slowing down. The consumer spending deflator is reading 2.1 percent for the past year, compared to over 3 percent six quarters ago. The core inflation rate is down to 1.9 percent, below the Fed's 2 percent target.

Even employment is holding its own. According to Automatic Data Processing's private employment survey, which showed its strongest gain in four months, October looks like it will produce about 125,000 new jobs.

Meanwhile, rising exports of American goods and services are booming to such an extent that the deep housing recession is being cancelled out. And while many continue to predict a consumer collapse because of falling home prices and tighter credit, after-tax inflation-adjusted income is 4.1 percent ahead of last year, for a $344 billion gain, while the purchase cost of energy prices are flat. The little noticed factoid is that consumer energy use per unit of GDP has actually fallen by more than 50 percent in recent decades.

Again: If things are so bad, why are they so good?

The stock market roared after the Federal Reserve cut its target rate on Wednesday by 25 basis points to 4.5 percent. The rate cut was a small insurance policy, just in case the subprime credit crunch and the housing downturn take a larger toll on the economy.

But listening to the Democratic presidential debate on Tuesday, you'd think it was 1929 all over again. The litany of scare-talk complaints includes China trade unfairness, globalization, immigration, income inequality, stagnant wages, a shrinking middle class, the sinking dollar and high oil prices.

Yes, there is home deflation on Main Street and loan deflation on Wall Street. It will continue. But what about the rest of the story? When you listen to the hedge-fund short-sellers and the liberal politicians as they attempt to discredit the Bush economic boom, you could almost fall for their bear-market seduction. But the seductress turns out to be an economic harlot -- not a beautiful woman.

The true message of the strong economy is that we're virtually guaranteed of a Goldilocks soft landing or better -- and certainly not a recession.

It's interesting that while the Bush tax cuts of 2003 continue to encourage investment and entrepreneurship, expanding national income and higher tax collections have brought the big bad budget deficit down to $160 billion, or roughly 1 percent of GDP. Using something called the primary deficit -- which extracts net interest on the debt and can be used to measure fiscal stimulus on the economy -- we actually have a 70 billion surplus.

These are all reasons why it would be foolhardy to embrace large-scale tax-hikes to allegedly fight the budget gap.

House tax chief Charlie Rangel's great idea to reduce the corporate income tax is the first pro-growth tax-cut measure from a Democrat in many years, and hopefully his effort will spur a discussion of full-scale tax reform by the Republican and Democratic candidates. But looking to the rest of Rangel's plan, there are ways to eliminate the alternative minimum tax that do not require big tax hikes on the most successful earners and investors.

For example, the Bush administration's tax-reform panel, chaired by former Sens. Connie Mack and John Breaux, proposed a growth-and-investment plan with only three income-tax brackets of 15, 25 and 30 percent. They would repeal the AMT and reduce the corporate tax to 30 percent. Capital gains and dividends would remain at 15 percent.

Or there's the new plan from Wisconsin House member Paul Ryan, which would move to a 10 percent and 25 percent tax system while also eliminating the dreaded AMT.

In other words, there are a lot of ways to gently nudge tax rates lower while broadening the tax base that would keep the Bush boom going well into the future.

The print and broadcast media do not give President Bush much credit for his economic policies. But somehow I have to wonder whether low unemployment, strong growth, negligible inflation and record stock markets do not deserve just a bit of praise.

It is still the greatest story never told.