One of the things I like most about history is that it occurs in an environment where all of the major axe-grinders are no longer alive. And the wonderful thing about an election season is that we don’t have to wait decades for all the axe-grinders to die off before we can get a clear view of things. Instead, once the campaigns shut down, the level of background noise recedes dramatically.
This means that we now have an opportunity to look back at the year 2004 and see whether the Bush experiment in supply-side economics has worked.
Last year was the first full year after the large supply-side tax cuts of May 2003. In one fell swoop the president accelerated all of his marginal tax cuts and dramatically decreased the taxes on capital gains and dividends. That first achievement (accelerating the tax-rate cut) is especially significant as the rate cuts on the wealthiest individuals were generally deferred into the distant future when the tax cuts originally passed in 2001.
Now that 2004 is complete and the political din has receded — and with nearly all of the economic data on 2004 now available — we can look back and see whether the experiment worked.
No matter how good or bad an economy is, there are always some mixed messages in the data. There is no boom so great that you can’t find a downward pointing indicator; there’s no bust so dire that you can’t find an upward pointing one. The best way to cut through such ambiguity is to look at those economic indicators that are highly inclusive — that is, indicators that include the widest view of economic activity, netting out the good and the bad against one another. The statistic that does this best is gross domestic product. GDP simply describes the amount of net new wealth that is created in any given year. Some sectors of the economy expand, and some contract in any normal period, but when you subtract the contractions from the expansions, what you have left is the change in GDP.
As of September, GDP is on pace to end the year with a 4 percent (to be precise, 3.95 percent) increase over the prior year. To put this in perspective, the average for the past 20 years is a growth rate of 3.3 percent, which was also the average for Bill Clinton’s first term. In fact, the average since WWII is 3.5 percent. In other words, it turns that the economy really was booming in 2004. At the current pace, it is highly likely that total annual wealth creation in the U.S. is at its highest mark ever: $12 trillion per year.