Politics & Policy

Bernanke & Goldilocks

Our new Fed chair has stopped inflationary fevers while laying the groundwork for what is virtually a runaway bull market.

So, Federal Reserve chairman Ben Bernanke, testifying before Congress this week, officially threw in with Goldilocks — moderate growth and declining inflation. And stock markets loved it, with shares soaring in all sectors around the world.

Just look at Bernanke’s bullet points: Business is strong. U.S. exports to the rest of the world are rising. The consumer is healthy. Unemployment is low. Wages are on their best run in years. And inflation is in check.

Pure Goldilocks.

As expected, Senate Democrats like Christopher Dodd and Chuck Schumer barraged Bernanke with talk of income inequality and wage stagnation — an attempt to downplay the excellent economic news while paving the way for a tax hike on the most-successful American earners. But wages are booming, and not just for the top earners, but for all earners.

Like class-warfare arguments of old, today’s inequality story is so much statistical illusion and faux arithmetic. And Bernanke sees right through it. He’s a man who believes that better education, not higher taxes, is the key to unleashing worker competitiveness and success in the globalized economy. Naysaying senators are not going to ruffle his feathers.

Interesting guy, this Ben Bernanke. On the one hand he’s a seasoned government policymaker: Following a three-year stint on the Federal Reserve Board he served as a top White House economic advisor. On the other hand he’s an academic: He’s one of only a couple non-socialist members of Princeton’s economic faculty. And he has the air of a Talmudic scholar. On Capitol Hill this week, with his slightly hunched posture and closely clipped beard, he even looked like a Talmudic scholar.

But most importantly, he’s doing his job.

Since taking the spot at the Fed last February, Bernanke has stopped inflationary fevers while laying the groundwork for what is virtually a runaway bull market.

The Dow, transports, utilities, the small-cap Russell 2000, the NYSE, the Wilshire 5000 — they’re all moving toward all-time highs. Inside these indexes the story is the same: Commodities, cyclicals, defense, machinery, and construction are setting record after record. The depth, breadth, and resiliency of this rally is remarkable.

As for breadth, America’s bull-market economy stands at the epicenter of the newly capitalist world economy. So it’s no surprise that America’s stock rise is being emulated worldwide. This is called economic leadership. As American-style, free-market capitalism goes global, non-inflationary growth and rising living standards become global phenomena. Some call it cowboy capitalism, but I prefer to think of it as prosperity capitalism.

But let’s focus on the epicenter of this global boom. Stocks are the best barometer of future business and economic health, and they are signaling that the wealth of this nation, currently and prospectively, is excellent. Record wealth is now being created among the more than 100 million investors who reside in the U.S., including the union and public-employee pension-fund holders who are 60 percent invested in this bull market. Even though this slice of America might rail against stock market wealth and business in general, its retirement bread is being buttered by the expanding portfolio value of the ownership society.

And none of this is much of a surprise. Demand-side Wall Street bears fail to understand this, but President George W. Bush and his Fed appointee, Ben Bernanke, have restored the Ronald Reagan approach to non-inflationary growth economics: tight money and low tax rates.

Do the bears recall that it was President Bush who appointed Bernanke? Can they grasp how Bush’s record-low tax rates on capital have promoted strong economic growth? Do they appreciate how this tax-driven growth-and-investment surge is bringing down inflation by absorbing the excess money created by Alan Greenspan between 2003 and 2005?

It’s the classic one-two punch. In his brief tenure at the Fed, Bernanke has mopped up excess liquidity and reduced inflationary expectations; he has stuck to his free-market principles while targeting inflation and employment. Meanwhile, low tax rates have led to the availability of more goods and services, a growth cycle that makes the existing money supply less inflationary.

This is a supply-side model, and it’s very much in place right now: A combination of strong economic growth and newfound monetary control are working together for the betterment of investors, workers, and businesses — and even federal finances. According to Wall Street economist Michael Darda, surging tax receipts have reduced the federal deficit to only 1.4 percent of GDP, significantly below the 2.3 percent average of the last three decades.

The recessionists are wrong. The bears are wrong. The pessimists are wrong. The doom-and-gloom crowd is wrong. The Democrats who rule the roost on Capitol Hill are wrong.

We are witnessing the Bush-Bernanke boom, and it’s still the greatest story never told.

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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