There can be no doubt that the American economy is in the midst of a strong economic expansion. Growth of gross domestic product is booming, inflation and unemployment are low, household net worth and disposable income are at all-time highs, and more Americans own their own home than ever before.
For all that, it’s no mystery why 30 percent of Americans, according to recent polls, think we’re in an economic recession. That’s any easy one. They’re all Democrats. A much more interesting question is: What started today’s economic expansion in the first place? If we knew the answer to that question, we’d know what to do to create economic growth — and what not to do — so that today’s strong growth won’t be derailed.
The best way to find out what caused today’s prosperity is to go back to when that prosperity began and take a hard look at those circumstances.
According to the National Bureau of Economic Research, the official end of the last recession — and the origin of the current expansion — was November 2001. It’s true that since November 2001 lots of economic indicators have markedly improved. Real GDP has grown by 14.8 percent. The unemployment rate has fallen from 5.5 percent to 4.7 percent, as 4.1 million new payroll jobs having been created. The S&P 500 is up 24 percent and corporate earnings are up 67 percent. Manufacturers’ new orders are up 31 percent, and private sector non-residential fixed investment is up 33 percent. Federal income-tax receipts are up 12 percent.
Those are big numbers. But what catalyst triggered their birth in November 2001?
All I can think of is what happened the prior month — the 9/11 attacks on the World Trade Center and the Pentagon. Terrorism causes prosperity? How’s that for an economic theory?
That might not be as far-fetched as it sounds. Many economists believe that wars can trigger economic booms, so why should the war on terrorism be any different?
But I have a better theory. It depends on using a different date for the end of the recession and the beginning of the expansion. Let’s see what happens if we use April 2003. I’m going to throw a lot of numbers at you here, but try to follow along. It’s going to be worth it.
In the 17 months from November 2001 (NBER’s official recession end-date) to April 2003 (my proposed recession end-date), real GDP grew 3.2 percent. But in the 36 months from April 2003 to now, real GDP has grown much more: 11.3 percent.
From November 2001 to April 2003 the unemployment rate actually went up — from 5.5 percent to 6 percent. And 1 million payroll jobs were destroyed. Talk about a jobless recovery! But from April 2003 to now, the unemployment rate has fallen to 4.7 percent and 5.1 million payroll jobs have been created.
From November 2001 to April 2003 the S&P 500 fell 18 percent. Some bull market! But from April 2003 to now, it is up 51percent. Now that’s a bull market.
From November 2001 to April 2003 corporate earnings grew a paltry 7 percent. But from April 2003 to present they’ve grown a stunning 56 percent, and are now at all-time highs.
From November 2001 to April 2003 manufacturers’ new orders fell 5 percent and private sector non-residential fixed investment fell 1 percent. Not exactly a big vote of confidence in growth. But from April 2003 to now, new orders have swelled 38 percent and fixed investment has surged 35 percent.
From November 2001 to April 2003 federal income tax receipts fell 11 percent, contributing to record government budget deficits. But from April 2003 to present, tax receipts have exploded by 26 percent, and now stand at all-time highs. In fact, it was reported this week that tax money is pouring into the Treasury at such a torrid pace that our government now holds a record $94 billion in excess cash.
Sure, economists at the NBER can trot out their own numbers and make November 2001 look like the turning point. But I’m not buying it. Today’s booming economy was born just after April 2003. The numbers that really count — the ones I’ve listed above — prove that beyond the shadow of a doubt.
So what caused it? What happened in the world just after April 2003 that triggered so much prosperity?
Haven’t you guessed? It was the 2003 tax cuts on personal income, dividends, and capital gains. They were enacted into law in May 2003. The rest is history. Very prosperous history.
It’s really so simple. Tell people they will get to keep more of the fruits of their labors and the fruits of their investments, and they will labor more and invest more. The economy will grow.
It will grow despite the Sarbanes-Oxley Act. It will grow despite the ever-present threat of strike suits from the plaintiff’s bar — or from the Inquisitor General of the State of New York. It will grow despite how the Patriot Act makes it harder to move money and assets across national borders. It will grow despite threats of protectionism. It will grow.
So there’s no mystery about how to create prosperity. The only mystery is why the Republican majority in Congress hasn’t been able to extend the tax cuts on dividends and capital gains for another two years so that they will not automatically expire after 2008. A bill to do just that was supposed to be enacted last year, but is still mired in petty personal feuding between Senate Finance Committee chair Chuck Grassley and House Ways and Means Committee chair Bill Thomas.
In a risky election year, the Republican party should be taking well-earned credit for our prosperity — pointing to those tax cuts as the crown jewel of their economic-policy legacy. But if those tax cuts cannot be extended while the Republicans control Congress, then the GOP will be responsible for bringing our prosperity to an end. If that happens, the Republican majority will deserve to lose — and lose big — this November.
– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at mailto: don@trendmacro.com.