by Larry Kudlow
August 22, 2006
Some conservatives are alleging that the president suffers from an inability to communicate with the American people, and there may be some overrated truth to this. But in a news conference last Friday, we saw George W. Bush at his communicating best.
Following a meeting with his economic advisors at Camp David, the president let ‘er rip, stating that: “The foundation of our economy is solid, and it’s strong. Because of the tax cuts we passed, American workers and families and small businesses are keeping more of the money they earn. And they’re using that money to drive this economy of ours forward.”
Could he be any clearer?
The mainstream media won’t report the economic good news. And many on Wall Street don’t even want a strong economy, for fear of more rate hikes from the Federal Reserve. The day after the president’s Camp David message, The New York Times editorial cried, “Hold the champagne,” and proceeded to obsess about a slowdown in housing.
There’s no counting how many recessions Times columnist Paul Krugman has predicted, but Bush was exactly right to point out the 4 percent real GDP growth during the first half of 2006, brisk productivity rates, 5.5 million new jobs over the past three years and a historically low 4.8 percent unemployment rate.
Bush’s critics say he’s whistling past the graveyard. But the president rightly insists, “The entrepreneurial spirit in the country is strong, and that’s good for America.”
Bush inherited the Internet bubble meltdown from the Clinton years, as well as the corporate scandals. Then came the attacks of 9-11 and the ensuing war. But the Bush recovery also followed suit, the result of slashing high marginal tax rates on investment in mid-2003.
And the recovery continues. Recent strong numbers for retail sales and industrial production suggest a 3.5 percent economic growth rate in the second half of 2006, a far cry from soft-landings, hard-landings or the recession scenarios that are beginning to proliferate.
And when the president says economic growth has had a positive impact on the budget, he’s right again. Tax receipts are growing around 14 percent for the second straight year, the biggest gain in a quarter of a century. Income-tax collections, bolstered by the success of owner-operated business entrepreneurs and other self-employed, are helping lift these revenues. These folks, who prefer unincorporated Subchapter S or limited-liability company partnerships, are the ones who show up in the household survey of employment — which is at a record high.
Meanwhile, non-withheld revenues from lower-taxed capital gains and dividends are paying for themselves. Total tax receipts in 2006 will come in around $2.4 trillion, roughly $400 billion above the tax-collection peak of 2000.
The Congressional Budget Office may now acknowledge that deficit projections were $100 billion too high, but it maintains that only higher taxes in the next 10 years will solve the budget problem. This defies common sense. If it pays less to work and invest after-tax, as implied by the CBO scenario, does anyone truly believe people would work harder to expand the economy? If that were the case, then why not raise tax rates back to 70 percent, where Reagan found them, or 91 percent, where JFK first had them? The CBO’s thinking begs credulity.
Yes, $3 gas at the pump has cut into the economic success story. Our biggest economic challenge has been higher energy prices, itself largely a function of the worldwide spread of capitalism and low tax rates that has led to strong global growth. But the heavyweight energy story could be lightening up.
At high prices and profits, market forces are generating more production and less consumption. For the first time in 15 years, the number of new oil wells drilled in the United States has surpassed the 1,000 mark. The rotary rig count is up 23 percent from a year earlier. Total exploration and development is 30 percent higher than last year. Unleaded gasoline futures have been dropping, suggesting relief at the pump.
Meanwhile, bond rates are coming down as the Fed removes excess liquidity to stop inflation. Mortgage rates are now declining, with Wall Street economist David Goldman noting that home prices actually increased slightly in the second quarter, after falling in the first. Much of the housing slack will be taken up by the highly profitable business sector, as resources shift from residential construction to a new boom in commercial and corporate building. Stock markets, by the way, continue to rise, and are within shouting distance of five-year highs.
All this is not to say that the president doesn’t have a problem with the Iraq war. He does. But on the low-tax economy, Bush has the story right.
Low tax rates, strong economic growth and shrinking budget deficits — it’s still the greatest story never told.
— Larry Kudlow is host of CNBC’s “Kudlow & Company”, economics editor for National Review Online and a nationally syndicated columnist. He served in the Reagan Administration and on the Bush-Cheney transition team.