Politics & Policy

Bush’s Supply-Side Boom

Witness the economic power of lower marginal tax-rate incentives.

The economy is on a tear. You might not know this from coverage in the mainstream media, which may have a built-in bias against George W. Bush. Sure, some big outlets like the New York Times have come around at least somewhat on the president’s freedom-and-democracy revolution in the Middle East. But they’re not about to concede on the economic power of lower marginal tax-rate incentives.

Too bad, because the evidence is overwhelming that the supply-side tax cuts enacted in the spring of 2003 have triggered an economic boom. Yes, I will call it the Bush boom.

Friday’s payroll-jobs increase of 262,000 is yet another data-point arguing that the economy may actually be speeding up in the first half of 2005. Using a 12-month moving average of monthly job changes, nonfarm payrolls have increased to 200,000 through February 2005 from a decline of 150,000 going all the way back to January 2002.

Since May 2003 — which not coincidentally was the debut period for Bush’s tax cuts on personal income, dividends, and capital gains — the economy has generated 3 million new jobs. Using the Labor Department’s household survey, 2.6 million more people have been employed since the tax cuts. The unemployment rate has dropped to 5.4 percent from 6.3 percent. Weekly unemployment claims have fallen to 300,700 — the lowest since late 2000.

There are lots of other good data points. To wit: January factory orders for non-defense capital goods (excluding volatile aircraft) are 17 percent above year-ago levels, while shipments are running 14 percent ahead of last year. In other words, there is a capital-spending boom going on.

Retail sales are picking up smartly. When measured against year-ago levels, sales at department stores, specialty shops, and other retail outlets are 4.8 percent ahead of last year. A record 84 percent of merchants beat expectations.

In the technology sector, January chip sales rose 17.5 percent against the year-ago level, according to the Semiconductor Industry Association. Meanwhile, the transportation sector is white hot. Rail freight car loadings are 12.6 percent above a year ago and freight tonnage shipped by trucks is 20.6 percent above the year-ago mark. The Dow Jones transportation index has reached another all time high.

The productivity miracle also continues apace. Output-per-hour by nonfarm companies has increased 2.8 percent over the past year, in line with the 10-year trend average. Because of all the technologically related efficiencies now in place throughout American business, unit labor costs are only 1.3 percent. And because labor costs are low, profit margins remain positive.

Hence, with business sales rising 11 percent, profits are gaining by leaps and bounds. Net operating earnings for S&P 500 companies increased 22 percent in 2004. While profits will slow in 2005, they will still register solid double-digit gains. In other words, rising profits will continue to fuel the strong business expansion. That is the heart of economic growth.

Some economists are grousing over the strength in raw-material futures prices, with the Commodity Research Bureau’s index now back at 1981 levels. These worrywarts are saying that inflation is bound to be a problem.

But consider this. In 1980-81, core inflation was 10 percent. Today it is 1.6 percent (using the personal spending deflator). One might ask, Why did rising commodity prices cause high inflation then, but not now? The answer lies with the numerous pro-growth policy changes over the past 25 years that have streamlined the economy and generated much more income and output growth.

Lower tax rates, deregulation, trade liberalization, capital investment, and the technology-induced productivity surge are all counter-inflationary measures. That is, each new unit of money creation by the Federal Reserve is less inflationary in today’s free-market capitalist environment.

The global spread of capitalism and growth, especially among emerging economies in China, India, and Eastern Europe, is what’s really impacting the commodity world. These growth stories require basic materials and industrial goods. So commodity demands, which are commercial in nature, have led to raw-material price increases. Unlike the 1970s, central banks are not producing the excess money today that would raise future inflation.

This is why worldwide bond yields are historically low. Global credit markets are not demanding high inflation premiums. The worldwide commodity boom is a growth signal, not an inflation signal.

Growth is never inflationary. The same goes for more people at work. The spurt in global economic growth is absorbing all the money created by central banks today. There is no monetary overhang to cause significant inflation. That’s why the current commodity boom is completely unlike the one 25 years ago when hard goods and real assets were used as inflation hedges.

Today’s story is totally different. And it’s a very good story at that.

– Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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