America’s resilient, durable, flexible, market-driven economy — which features the lowest central-planning influence of any of the thirty major world economies — continues to surprise the pessimists.
With numbers now in for third-quarter gross domestic product, the U.S. economy has maintained a solid, if unspectacular, recovery over the past year. It has grown at a 3% rate, with 3.6% growth in the domestic economy (real gross domestic purchases), since the end of the recession a year ago. That’s solid. The unspectacular part is that first-year recoveries have typically run in the 5% to 7% range. But let’s be thankful that the American economic machine is in fact growing at all.
We can’t forget that the onset of war a little more than a year ago, in the wake of the terrible bombings of the World Trade Center and the Pentagon, virtually closed down U.S. commerce and financial operations for a time. So, in producing 3% growth, America has performed admirably. This should shutter partisan arguments that President Bush has failed on the economy.
Of course, the Democratic party, in full-campaign stride, is out painting a picture of an ever-present and terrible recession. But a combination of modest tax cuts and a monetary nudge from the Fed has helped generate economic recovery instead of a widely forecasted and prolonged downturn. The consensus of economists who made that recession forecast following the terrorist attacks gave new meaning to the term dismal science. And they were dead wrong.
The pessimists also missed on the technology sector. While tech stocks have taken a lot of the heat for the worst stock-market correction in decades, rapid productivity gains from the application of technological advances continue to work inside our $10.5 trillion GDP. Share prices for tech-based companies have faltered, but this sector is now sending out signs of recovery.
In the new GDP report, business investment in equipment and software increased 6.5% at an annual rate in the third quarter — its best performance in 2½ years. Business spending on durable goods increased 23% annually. Computer sales are up, rising at a 75% annual rate in the most recent quarter. Wireless is doing well, with top-line sales and profits at Nextel, Verizon, and AT&T coming in surprisingly robust. And customer demands for cable and broadband are spiking, if Comcast is any measure of performance. In short, the tech sector is waking from its long sleep.
And so is the stock market. With overall corporate profits rising by roughly 20% in the third quarter, backed by a 3% growth-trend in the overall economy, the U.S. stock market has now established a firm base from which future increases can no longer be in doubt.
The only thing in doubt is the speed at which we are capable of growing. And to figure that out, we may have to look to Washington.
If Congress and the White House return growth-minded from next week’s election, they can get right to work by eliminating the double and triple taxation of dividends and other forms of investment. Such a policy action could put profits from the sale of stocks and homes on an equal footing where they belong. Next, new business start-ups, which are the engine of employment, should be made tax-exempt in their early money-making years, and then taxed at half the normal rate for a few years thereafter.
Growth-minded policymakers should also speed up the arrival of the Bush income-tax cuts passed in 2001. More, they should make permanent the across-the-board tax-rate-reduction program and the 30% cash-expensing bonus for business write-offs of new equipment. Finally, the Federal Reserve should be encouraged to inject more cash into the economy. This would stabilize business prices, finance growth, and improve our potential to expand.
On the other hand, there’s always a risk that policymakers might embrace the Great Society leftover plans now being suggested by numerous Democrats on the campaign trail. This would be a stupid step backward in history toward liberal Keynesianism. But the likeliest voters — those who are shareholders and business owners — can be counted on to reject the anti-growth consequences of increased spending and higher taxes.
Surely the prosperity of the past two decades has proven that business investment is the key to growth. It is our businesses that create jobs and the income that sustains consumer spending. But capital formation is essential to those businesses. We must strive to make the tax cost of business capital in the U.S. the lowest in the world.
And let’s not forget, a vibrant economy at home is necessary to produce the military and national-security resources that are so essential to the spread of freedom and democracy to the darkest corners of the world.