Politics & Policy

The Comfort of History

The economic bad patch won't last much longer.

My crystal ball is no better than anyone else’s when it comes to predicting the advent of a new bull market and prosperity cycle. But I believe we’ve seen the end of the three-year downturn — the longest since 1939-41. When the combined fog of bad weather, war, and spiking energy prices finally lifts, and the full impact of lower taxes and easier money takes hold, the stock market will rise by 40 percent and the economy will resume the 3½ percent growth trend it has known since the end of World War II.

Our economy of free choice and free markets, with relatively fewer tax-and-regulatory obstacles than any other spot on the planet, always musters the entrepreneurial spirit that drives us inexorably toward prosperity. Yes, we’ve had a bad patch over the past few years. But it won’t last much longer.

Consider a bit of recent history.

Just more than two decades ago the U.S. appeared to be losing the Cold War to the Soviet Union. The domestic economy and stock market were hopelessly mired in what we then called stagflation: inflation and interest rates had blown sky-high, the economy was sinking, and unemployment was rising. Naysayers, particularly those on the Left, were challenging the free-market capitalist system itself.

But let’s review the bidding since then.

The broad stock market has increased 550 percent since 1980 (including the last three-year malaise). Interest rates on Treasury bonds have fallen to 4 percent today from nearly 16 percent back then, as first Paul Volcker and then Alan Greenspan completely broke inflation’s hold.

On the jobs front, the unemployment rate peaked 20 years ago at close to 11 percent. Today it is less than 6 percent, after falling as low as 3.9 percent two years ago. Conventional economic textbooks have been thrown out the window as inflation and unemployment trended lower at the same time.

And there’s more. Since 1980, private job payrolls have increased by an incredible 34.6 million, a near 50 percent gain. Meanwhile, the economy as a whole has grown by $4.6 trillion, almost a doubling from 22 years ago.

Few in their right mind would have forecasted the sweep and scope of this American prosperity in 1980. Few, for that matter, would have predicted a bloodless end to the Cold War, with the U.S. claiming victory over the Soviet Union and its numerous client states.

Of course, the lion’s share of credit for our massive and overflowing prosperity must be given to the individual men and women inside the economy who run the businesses and do the work. The same holds for foreign policy, where our greatest resource year in and year out is the American GI. (Could this be more evident than it is today?)

Sometimes a leader comes along who can uniquely mobilize both sets of troops — our soldiers in the workforce and those who defend our nation. Ronald Reagan was such a leader. By refusing to accommodate the Soviet Union, and insisting that the entire communist system could be brought down, he launched the most successful counter-revolution in international political history.

He also launched an economic revolution by slashing personal tax rates and deregulating industry after industry. Using common sense, he sought relentlessly to remove barriers to growth wherever they were hobbling entrepreneurial spirits. Then he used the vast flow of economic output to finance a reformation of defense. Our military got all that they needed to restore American primacy around the world.

There is much gloom and worry today, but let’s not forget that President George W. Bush is following in Reagan’s path. The enemy abroad is terrorism, not Soviet communism, but the presidential determination is just as strong as it was two decades ago. On the home front, Bush is using the same compass as Reagan: He’s launching a massive pro-growth tax-reform effort that not only features lower tax burdens for individuals, investors, and businesses, but will include a thorough overhaul of retirement and healthcare before he’s done.

Sometimes, when things go against us, we forget our historical legacy. But overcoming challenges is the American way. Things looked bleak in the early 1940s as the depression lingered and we were attacked at Pearl Harbor, but we prevailed. The nation was literally tearing itself apart in the early 1860s, but we prevailed then too. The Founding Fathers faced the ultimate challenge — but they met it, and America was born.

Here’s a recommendation: Find an easy chair and think about all this. Think about the strength of a free American people and their ability to overcome temporary obstacles on the road to liberty and prosperity. It’s a comforting thought.

Mr. Kudlow is CEO of Kudlow & Co.


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