The Corner

No Recession

A number of economists on and off Wall Street are ringing the recession bell, as they have so many times in recent years. But the Goldilocks economy has proven to be more durable and resilient than her critics appreciate.

Goldilocks dodged two potentially recessionary bullets this week. While modest gains in retail sales and industrial production suggest temporarily slower growth for the U.S. economy, these indicators are not signaling recession. In particular, Friday’s 0.1 percent production increase — which comes to 2.4 percent at an annual rate over the past 3 months and 2.3 percent over the past 12 months — removes the recession scenario. It’s slow growth, but it’s growth nonetheless.

To get a true recession reading, the production index would have to fall for 4 to 6 months in a row. That’s not happening. Despite some monthly declines over the past half year, the production reading for January was 114.2 — exactly where it was in July and September of last year. Looking inside the January index, there was a 0.3 percent increase for consumer-goods production and a 0.4 percent rise for business equipment. Both are solid numbers.

Meanwhile, the just-released January retail sales report defied the recessionistas with a better-than-expected 0.3 percent gain. Retail sales are climbing at a 2.7 percent annual rate over the past 3 months and a 3.9 percent rate over the past year.

Trade exports also continue strong, with the new December number showing a huge $144 billion gain. Out on the campaign trail, Hill-Bama mutters protectionism at every stop. But export trade has grown by nearly 50 percent — or 9 percent yearly after inflation — for the past four years. The real export sector now accounts for nearly one-third of U.S. gross domestic product, yet more proof that the global economic boom is alive and well.

There seems to be too much angst over various credit problems in the banking system — such as defaulting sub-prime loans, leveraged corporate-buyout paper, unhealthy bond insurers, and, more recently, a clog up in short-term municipal bonds. All these credit issues have yet to be fully worked out. But there is so far no evidence they have dragged the economy into a contraction.

It’s also noteworthy that the Bush tax cuts remain in place for investment. And while the newly signed rebate package is a wet noodle, it does call for temporary cash expensing to promote business investment. This could ultimately do some good.

Critically, the Federal Reserve’s easing moves — going back to last September and including January’s “shock and awe” 125 basis point rate cut — are beginning to impact the economy and should deliver more pronounced effects later this winter and in the spring. An easier Fed and low tax rates may not only keep us out of recession, they could move the economy up from 1 percent growth this winter to 3 percent growth in the second half of the year — perhaps as early as the second quarter. I’m keeping my fingers crossed. But free-market capitalism on the supply-side is weathering the credit storm better than most folks think.

The challenge now is to ensure that free-market capitalism on the supply-side continues.

Hill-Bama is campaigning on a populist platform of taxing businesses and rich people. This fiscal nymphomania will create new government bureaucracies on infrastructure and energy totaling a couple hundred billion dollars. It’s beyond the pale.

For the fiscally tightfisted Sen. John McCain, and his crusade against unnecessary spending and earmarks, there is a great opportunity here. McCain can build on his pro-growth corporate-tax-cut proposal with a broad-based tax-reform plan. This approach would lower tax rates across-the-board and broaden the base by removing unnecessary exceptions and loopholes. In effect, while Hill-Bama copies Western Europe’s failed economic playbook, McCain can replicate the tax-reform success over in Eastern Europe.

Whether it’s national defense, homeland security, or economic growth, the key to a McCain victory over Hill-Bama in November is to compare and contrast two visions of America’s future. The contrast couldn’t be greater. Hill-Bama trashes corporations. But Sen. McCain understands that by lowering tax rates on corporations, vital capital will be unlocked, leading to business expansion and job creation.

Speaking in Warren, Ohio, this week, Sen. Clinton singled out oil, credit-card, insurance, pharmaceutical, investment, and student-loan firms in a massive attack on business. She’s attacking corporations that employ 23 million people and, by the way, pay higher than average wages. In other words, Clinton is attacking 23 million jobs. This is the forgotten middle-class. And they know that if politicians curb or confiscate the profits of their companies, it is they, the workers, who will be harmed.

This is what Hill-Bama fails to understand. This is why Hill-Bama policy would be so damaging to the economy. Corporations are profitable, sure. But wage earners get 70 percent of the profits; investors share the remaining 30 percent.

And these companies pay a colossal fortune in taxes. Exxon Mobil is a perfect example. Over the last three years, Exxon Mobil has paid an average of $27 billion annually in taxes. $27 billion! As my friend, economist Mark Perry, points out, while corporate profits receive a lot of media attention, the corporate taxes paid on these corporate profits are largely overlooked. Dr. Perry also points out that Exxon Mobil pays as much in taxes annually as the entire bottom 50 percent of individual taxpayers — a full 65,000,000 people.

The choice is clear: Jimmy Carter-style big-government spending, taxing, and regulating all over again. Or supply-side free-market capitalism that can endure the inevitable negative shocks, shorten the cyclical downturns, and fuel the engines of economic growth.

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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