The Commerce Department reported today that real economic growth declined from 2.6 percent in the second quarter to 1.6 percent in the third quarter of 2006. The Democrats and the mainstream media will no doubt say this is firm evidence that President Bush’s tax-cutting policies are starting to fail and that it’s time for a new policy direction. Critics also might blame the Federal Reserve for waiting too long to end its cycle of interest-rate hikes.
But these criticisms will be wrong: The ongoing economic expansion is a direct result of the sound fiscal and monetary policies of the past six years, while the current slower pace of economic growth appears to be cyclical and temporary in nature.
To begin, the housing market has cooled, which subtracts from GDP growth. However, no one expected the housing boom to continue. Additionally, the housing slowdown does not appear to be spreading to other parts of the economy (e.g., consumer spending continues to grow at a healthy pace), increased business construction is helping offset the decline in housing construction, and the housing decline itself may be ending: In September, housing starts increased and new single-family home sales rose 5.3 percent to 1.07 million (the second consecutive monthly increase).
Another one-time factor slowing economic growth was a significant drop in the production of motor vehicles in the third quarter. However, this decline was due to excessive inventories — especially for sports utility vehicles, which became less attractive to consumers as gasoline prices soared during the summer.
A GDP report for one quarter is simply one quarter’s worth of data. A broad range of indicators over a longer time period provides a much more accurate picture of our economy: To wit, the U.S. economy grew 3.5 percent across the four quarters preceding the latest GDP data, the fastest pace among industrialized nations. Productivity has expanded at a strong 2.5 percent over this period, well ahead of the average productivity growth rate of the 1970s, 1980s, and 1990s. The economy has created 1.8 million new jobs over the past year and 6.6 million jobs since August 2003 — more jobs than were created in Japan and the European Union combined during this period. And the current unemployment rate of 4.6 percent sits below the average for each of the past four decades.
Democrats complain that wages and incomes have stagnated during the Bush economic recovery. But as the economy has continued to expand, wages have increased by 2.2 percent over the past 12 months, faster than the average rate of the 1990s. In fact, wage and income growth would have been higher had they not been eaten up by higher energy costs. Additionally, real after-tax per capita personal income increased by $2,660 since Bush took office in 2001.
Back to the Federal Reserve, monetary policy has been just about right since 2001: Interest rates were reduced to combat deflation, and starting in mid-2004 were tightened to control for inflation without damaging economic growth. Since the Fed’s pause in August, inflation-sensitive commodity prices have come down by about 20 percent while inflation-protected Treasury securities have reacted favorably. Core consumer prices (excluding energy and food) have risen by 2.9 percent over the past year, an annual rate lower than the average for the 1990s.
The U.S. economy will continue to grow, create jobs, and increase wages, so long as the right fiscal and monetary policies remain in place. Fed Chairman Ben Bernanke has established himself as a credible inflation fighter, and will continue to provide a steady hand with monetary policy. However, low-tax fiscal policy is unlikely to continue if the Democrats take control of Congress on November 7.
For one thing, tax-rate increases are already baked in the cake. Under current law, the Bush tax cuts will expire on January 1, 2011, unless Congress passes legislation to extend them. Specifically, the capital-gains tax will increase from 15 to 20 percent, dividend taxes will more than double, income-tax rates in every tax bracket will rise (some by 450 basis points), low-income taxpayers will see their tax rates climb from 10 to 15 percent, and the federal death tax will return in its entirety in 2011.
According to the Heritage Foundation’s Center for Data Analysis, if Congress fails to stop these tax increases, the U.S. economy will lose $111 billion in real economic output each year between 2011 and 2014, more than 1 million jobs per year on average will be destroyed, and real after-tax household income will decline by an annual average of $274 billion.
Rep. Nancy Pelosi — the putative Speaker of the House should the Democrats gain control of the chamber — said of the Bush tax cuts in May 2003: “None of these tax cuts is affordable. None of them creates jobs, and they are not fair. All of them do damage to our long-term economic growth and contribute to the national deficit.”
Continued Republican control of Congress will mean lower taxes and continued economic prosperity. Democratic control will lead to higher tax rates, reduced economic growth, and lower job creation. One can only hope that enough Americans understand this economic choice come Election Day.
– Cesar Conda is a senior fellow of FreedomWorks and an editorial advisory board member of The International Economy magazine.