- The Washington Times - Tuesday, March 14, 2006

Despite the grim picture the mainstream media continue to paint about just about everything — the insurgent-ridden reconstruction effort in Iraq, the looming Iran threat, the failed Dubai ports deal, the twin deficits, the president’s sagging poll numbers, the Jack Abramoff scandal, and on and on — there’s one thing they just can’t taint: This U.S. economy remains very healthy.

It’s always amazing to listen to conventional demand-side economic pundits and mainstream reporters who try as hard as they can to minimize the excellent performance of the American economy ever since lower marginal tax-rate incentives were put into place almost 21/2 years ago.

The latest chant is that a warm winter has artificially stimulated consumer spending, and that a day of reckoning marked by a housing-price crash and an overwhelming debt burden is headed our way. This is utter nonsense.

Apart from the inherent resiliency of our free-market capitalist economy, the fact remains that tax-induced capital cost reduction and resulting higher investment returns have boosted investment, healed business woes, and created employment growth of nearly 2 million new jobs a year (and nearly 5 million since mid-2003 when the Bush tax cuts went into effect).

Unemployment sits at a low 4.8 percent today. Wages are perking up, with average hourly earnings rising 31/2 percent over the last year and 4.8 percent at an annual rate over the past three months — their best performances since 2001.

Importantly, falling gas prices at the pump are boosting real incomes enough that consumer spending is rolling ahead despite a slowdown in the housing sector and somewhat higher mortgage rates.

Of course, you can’t please the worrywarts. Yesterday they complained that wages weren’t rising; today they’re bellyaching that wage growth is too fast and that the Fed will have to tighten monetary policy much more to ward off cost-push inflation. This is more bogus Phillips-curve argument. But growth does not cause inflation.

Fortunately, new Federal Reserve Chairman Ben Bernanke rebutted the Phillips-curve view in a recent speech at Princeton. Mr. Bernanke correctly argued that low inflation promotes economic growth and strong economic growth is something to be desired, not shunned. The Fed chairman cited Milton Friedman’s argument of nearly 50 years ago that inflation is a monetary phenomenon and not a function of too many people working or prospering.

In Friedman terms, there is a wee bit of excess money in the system, as illustrated by bond market inflation spreads and rising gold prices in first-quarter 2006.

Monetary base growth, the raw material of bank deposits, is a bit too rapid. But some of this will be absorbed by strong business investment while the rest will be removed by the Fed as it raises its target rate a few more times.

All this is a normalization of interest rates in line with strong economic performance.

Reagan economic guru Art Laffer taught us 30 years ago that lower tax rates ignite economic growth. Now, the Laffer curve is tracking a business-led expansion that is throwing off record budget revenues while corporate profits are soaring.

Profits are the mother’s milk of business, the economy and stocks, and are laying the foundation for even heftier job gains.

According to the Fed, after-tax profits for the fourth quarter last year hit 8.1 percent of gross domestic product, a post-World War II record. At a trillion dollars, profits are way ahead of their prior 1999 peak and have nearly doubled since the recent trough in 2001. Family net wealth, the nation’s true savings rate, advanced 8 percent in 2005 to a record $52 trillion.

On Friday, appropriately taking on the mantle of salesman-in-chief, President Bush answered his critics by giving a strong speech arguing for first principles on lower tax rates, free trade, global economic connectivity, and using trade as a diplomatic tool as well as an economic growth measure.

Mr. Bush is certainly on the right track. And while Congress may appear to have gone offline on the critical extension of the 2003 investor tax cuts, Ways and Means Chairman Bill Thomas tells me prospects for extension remain good. If so, this economic expansion will continue for many years to come.

In the months ahead, Ben Bernanke will follow the anti-inflation thinking of Milton Friedman. President Bush will continue to embrace the pro-growth Laffer curve. And the anti-worker Phillips curve will be pushed into the dustbin of history.

In other words, economic growth principles will keep American capitalism on the prosperity path.

Lawrence Kudlow is host of CNBC’s “Kudlow & Company” and is a nationally syndicated columnist.


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