Politics & Policy

What I Learned This Week

Thoughts economic, global, and political.

The boat-building business is booming, with big backlogs for boats in the $80,000 to $300,000 price range. Why is this important? Prosperity. People buy luxury items when they’ve got the money to do so. This is a very positive economic-growth indicator.

‐ A mid-sized U.S. insurance company has been issuing a record number of group employee-benefit packages for disability, accident, and other coverage to small companies. This is a sign of new- and small-business formation, and yet another indicator of economic growth. This corroborates the rise of household employment data, which has again been running well above the more traditional establishment payroll numbers put out by the Labor Department. The household survey picks up self-employed and other start-ups that take years to be scored in the payroll survey. This economy is stronger than most folks think.

‐ Despite energy spikes, hurricanes, and multiple tightening moves from the Federal Reserve, the broad S&P 500 stock market has actually gained some ground since early 2004. This is a sign of latent economic strength. The S&P could be consolidating its base, following the big 2003 run-up, in advance of a huge increase next year.

‐ The investor class continues to expand, according a recent survey, with nearly 57 million U.S. families now invested in stocks. This is an incredibly powerful force for capital formation, economic growth, and pro-capitalism politics. Twenty years ago only one-fifth of families owned shares. Now it’s three-fifths.

‐ The Google revolution on the Internet makes me think of the overall technologically-driven productivity boom, which is now ten years old. This boom is measured conservatively at 3 percent yearly, suggesting at least a 4 percent annual rate for potential real economic growth. Economist Joseph Schumpeter taught us years ago that gales of creative destruction generate more than usual growth, profits, and real wages, with lower-than-usual inflation and interest rates. Schumpeter’s gales are blowing.

‐ The Angela Merkel grand-coalition deal in Germany will be a complete disaster for the already anemic German economy. Top personal tax rates will be raised, the VAT tax will be hiked, scheduled corporate tax cuts will be postponed, and proposed labor-market reforms will be pushed aside. This is unbelievable — worse than Schroeder. Say, “Bye, bye Germany.”

‐ Ben Bernanke is a real smart guy with a good idea for a numerical inflation target. But investors were turned off when he testified before the Senate this week in his bid to replace Alan Greenspan at the Federal Reserve. Just a guess: IRA and 401(k) owners may be worried that a 1 to 2 percent inflation target could be too close to deflation or recession. Regular investors may be Fed up with Fed fatigue over the robo-cop, auto-pilot tightening moves that have characterized the Greenspan central bank. If Bernanke says he’s going to be just like Greenspan, does that mean the rate hikes will go on forever, dooming the stock market along the way?

‐ George Bush could be bottoming, though it may take several months for this to become clear. But add up all the reasons why the Bush stock deserves a “buy” rating: 1) the economy is strong; 2) gasoline prices are falling; 3) the GOP Congress will pass a sizable tax- and budget-cutting fiscal plan; and 4) after another successful election in Iraq next month, at least 35,000 U.S. troops will be withdrawn in 2006.

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

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