Despite Friday’s disappointing jobs figures (December non-farm payrolls were up 1,000 against expectations of 136,000), the bulk of forward-looking indicators continue to point to better times ahead. Explosive economic growth and booming profits are more important frontrunners to the employment outlook than one disappointing report. In fact, the bulk of indicators are consistent with increases in non-farm jobs on the order of 250,000 to 350,000 jobs per month.
In textbook economic terms, dollar reflation (the Fed’s liquidity stance or the dollar’s decline in value) is shifting the aggregate demand curve out. At the same time, the 2003 tax cuts on capital gains, dividends, and labor increased after-tax returns to the factors of production by 42 percent. This is boosting the aggregate supply, investment, and production side of the economy.
The combined stimulus of demand and supply means that the monetary and fiscal locomotives are pulling in the same direction. As such, we should not be surprised to see full year 2004 growth of real gross domestic product come in around 5 to 6 percent. This would be fast enough to generate strong employment gains in the months ahead.
At some point the current weakness in the dollar is likely to push up inflation and interest rates, but the former could end up being a 2005 event due to the lags involved and the manifold flaws in the CPI index. The data show that a significant drop on the dollar against gold/commodities can take six quarters or more to show up in the backward looking indices like the GDP deflator and core CPI.
In the near term, a brightening jobs outlook will make it easier for President Bush to parlay his 2003 pro-growth tax cut into a pro-investor, pro-capital formation, pro-growth expansion of retirement savings accounts.
Originally proposed in early 2003, the president’s Lifetime Savings Accounts and Retirement Savings Accounts are aimed at simplifying and expanding traditional tax-advantaged investment vehicles. The proposal is likely to reemerge in Bush’s 2004 budget and likely will become the centerpiece of his reelection campaign.
The Bush plan would simplify the tax laws governing retirement accounts while boosting the yearly contribution limit to $7,500 per person (up to $15,000 for a married couple). Currently, there is a $3,000 per year limit for traditional IRA contributions. If enacted, the plan would energize capital formation by reducing the effective tax wedge on capital (after-tax dollars placed in the accounts would compound tax free while the gains would not be double taxed on the way out). This means a higher capital-labor ratio, faster growth, and an expanding tax base over time.
From a fiscal perspective, the 2004 election cycle is likely to be centered on a choice between growth and austerity. History shows that voters typically embrace growth and optimism over austerity and pessimism. Recall that Walter Mondale was clobbered in 1984 for proposing to remedy the fiscal deficit with an enormous tax hike. The Democrats seem not to have learned from this lesson and are taking a page right out of the Ted Kennedy playbook by proposing $2 trillion tax increases against an equal expansion in the federal welfare state. This would be disastrous for the economy.
If the Democrats are pushing austerity based on the record of President Bill Clinton they better go back and check the record again. Clinton’s 1993 tax hike was followed by the Democrats being turned out of both houses of Congress in 1994. From that point on, Clinton worked with the Republican Congress to advance pro-growth fiscal policies like tax-free retirement accounts, a lower capital-gains tax, free trade, and welfare reform. A better approach would be for the Democratic presidential hopefuls to re-embrace the John F. Kennedy agenda of hard money and low tax rates. What worked for JFK can work for the Democrats again. If the Democrats took this approach, it would up the ante for President Bush, which would result in even bolder and broader pro-growth reform.
– Michael T. Darda is chief economist and director of international investment strategy at MKM Partners, LLC, an equity execution firm located in Greenwich, Conn. Darda welcomes your comments at email@example.com