Silent Boom

Some of you may not be aware of it, but the U.S. economy is roaring on all cylinders (and bringing down the federal deficit) at a rate that considerably exceeds what was the case throughout most of the balleyhooed Clinton "salad" years. And that growth is due in great measure to President Bush's tax cuts:

"Better than expected." That is the headline being given to the progress of the US economy. Last year the deficit was a humiliating 3.6% of gross domestic product. The deficit this year, new numbers suggest, will be 2.7% of GDP - acceptable. The difference? Extra revenues. It seems federal revenues for this year will be $85 billion higher than anyone was predicting as recently as March. Growth, too, may be stronger than expected, remaining above 3%. Unemployment? Some forecasters now believe it will dive deep into the mid-4% range....

Yet few are asking what caused the cash flow. To read the papers, you would think that the fact that the Treasury is now swimming in revenue is like a cool August day at the shore after a number of hot ones: just another pleasant surprise.

But there should be no surprise. For the inflows are the direct result of the Bush Administration's commitment to a concept: individuals respond to incentives. Not merely targeted ones - a break, say, for a specific group of manufacturers - but overall incentives for enterprise. The Administration deduced from this concept that cuts in taxes on capital and work would inspire citizens and businesses to transact more. The Bush team then proceeded to make those cuts amid jeers about incurring
deficits....

The Bush White House and Congress flattened the steep stair-step progressive rate structure of the income tax, lowering the top marginal rate. They cut the tax on dividends to 15% from 39.6%; 15% became the new (lower) top rate for capital gains. They likewise created a one-time amnesty programme for companies repatriating profits. Corporate tax revenues this year increased 42% upon the year before. No one can be certain yet which change meant most to business; the full analysis of returns takes two years. But as Stephen Entin of Washington's Institute for Research on the Economics of Taxation notes, we know that the new money relates to non-wage income - profits of small businesses, dividends, capital gains. Taxable income increased the most where tax cuts were most dramatic.

Everything in economics happens at the margin. And when the marginal tax burden is lowered, that which is taxed invariably increases. And the more it increases, the more it benefits everybody. It is axiomatic.

But President Bush seems loathe to take credit for it, or even communicate that there is a boom. And a growing number of conservatives, both inside and outside government, are beginning to take puzzled note of it and pick up that PR slack. Meanwhile, his enemies, unable to use their "jobless recovery" canard or put over John Edwards' "two Americas" nonsense without appearing delusional, have taken to hyping every possible negative factor that could provide them with the "Bush collapse" for which they so desperately lust. The leading two angles in this regard are oil prices and the "real estate bubble."

However, neither is proving to be the looming economic grim reaper that the Bushophobes are looking for:

In a recent Wall Street Journal editorial, American Enterprise Institute visiting scholar John Makin wrote that, “America’s economy is heavily dependent on a housing boom.” To Makin’s way of thinking, the “existence of a bubble in major metropolitan areas is not in doubt,” so it’s up to the Fed “to engineer a carefully modulated tightening to avoid the same fate for the U.S.”...Though Makin’s story is a potentially chilling one, it’s fortunately not the whole story.

To begin, Makin said the “U.S. real estate bubble is a crucial ingredient in sustaining global demand growth;” the demand growth presently sustained by an “innovative mortgage sector [that] arranges for the easy withdrawal of rising equity in homes.” What Makin seems to miss is that whether we’re talking international or domestic savings, there is someone on the other side of each mortgage origination forgoing the very consumption he claimed is presently driving economic growth. At best the wealth effect he spoke of is a wash.

Moving to interest rates, Makin argued that steady Fed rate increases “will at least slow, and perhaps reverse, the sharp rise in housing.”...The U.S. real estate experience over the last thirty years offers...evidence that Makin’s interest-rate/property-price correlations are overrated. For one, each of the three property bear markets during that time (1974-75, 1980-82, 1990-92) occurred amidst falling rates, while the last “frothy” U.S. real estate market (1976-1980) occurred as the prime rate raced into the double digits.

Makin said a steady rise in the present federal funds rate will eventually slow the real estate boom, but from January of 1976 to January of 1980 the fed funds rate rose from 4.87% to 13.82%. If Fed rate hikes are so powerful, why has the 250 basis point rise this year been met with ever-rising property prices? Makin’s answer is that “long-term interest rates are actually lower than they were a year ago.” This would seem a logical answer except that the U.S. 10-Year Treasury rose from 7.8% in 1976 to 12.4% in 1980.

Affordability? Makin argued that it is “becoming an increasing problem at the margin.” Rising prices might make this seem so. But the National Association of Realtors announced last week that existing home sales “soared to new heights in the second quarter of 2005.” This occurred as volume hit a record, and as prices rose 13.6%.

In essence, John Tamny argues that the macroeconomic function of interest rate management is to stablize and strengthen the currency, and that the real estate market is affected by the surrounding economy as much as it effects it in turn. And on both scores the prognosis is demonstrably positive.

As the Bush expansion is not leaning on a housing crutch, neither is oil an economic sword of Damocles:

Why, then, are oil prices so high?

There is no esoteric reason. It is plain old supply and demand. With the economies of huge nations like China and India developing more rapidly, now that they have freed their markets from many stifling government controls, more oil is being demanded in the world market and there are few new sources of supply....

Today production is being held back, not by price controls, but by political hysteria whenever anyone suggests actually producing more oil ourselves. Organized nature cults go ballistic at the thought that we might drill for oil in some remote part of Alaska that 99 percent of Americans will never see, including 99% of the nature cultists.

People used to ask whether there is any sound if a tree falls in an empty forest. Today, there are deafening political sounds over oil-drilling in an empty wilderness.

Nor can we drill for oil offshore, or in many places on land, again for political reasons.

Chief among them the hope that the economy can be damaged by higher energy costs so that that can, in turn, be blamed on George W. Bush and (you guessed it) his tax cuts.

But just as with the "real estate bubble," the oil market is not devoid of good news:

Gas prices are high because crude oil has been selling for upwards of $60 a barrel. But that price fortunately looks as transient as a summer romance.

The going rate has been pushed up in the last couple of years by rising fuel consumption. But Michael Lynch, president of Strategic Energy and Economic Research Inc., says global demand has fallen short of predictions this year. Not only that, but crude oil inventories have been expanding in the U.S., which should help push prices down.

It turns out the law of supply and demand has not been repealed: When the price of oil rises, people consume less than they would otherwise. The longer oil remains expensive, the more people will look for ways to conserve it. Already, car buyers are flocking to gas-stingy hybrids, which were once regarded as the equivalent of living in a yurt.

Lynch expects prices to drop to $40 a barrel by the end of the year, if not sooner. He's not alone: The Russian government has drafted its 2006 budget assuming that's all it will get for its oil. That would bring gas prices down in the range of $2 a gallon.

And for those able to look beyond the end of their noses, or the current election cycle (whichever is longer), the news here is heartening as well:

Because aside from dampening demand, high prices have served the other
useful function assigned to them by economics textbooks: boosting supply. Oil producers, spurred by the lure of big profits, have been investing like mad in new sources.

"Significant new capacity will be coming onstream - much of it launched a few years ago on price assumptions much lower than today's market prices," according to Daniel Yergin, chairman of Cambridge Energy Research Associates. A recent study by his firm says that, based on investments already made, worldwide output could rise by as much as 20% in the next five years.

The sky, in short, is the limit, and prosperity lies before us as far as the eye can see. But it is also true, especially in politicoeconomics, that perception is nine-tenths of reality. And as the aforelinked Senator Jon Kyl (R-AZ) warns, that is the true danger of the left's high-octane bearism:

Still, as the Washington Post recently put it, "the latest data... show the economy picking up steam." So why does poll after poll show Americans to be so financially glum? Fear of a collapse in real estate values - the so-called "housing bubble" - has been a mainstay of the business pages for several years now, but the market seems to have stabilized nationally, and as long as the population keeps growing, people will need homes. The Federal Reserve has been raising interest rates, but mortgages and car loans are still remarkably cheap by historical standards. Could it be the news media's coverage, which tends to emphasize the negative? Partisan attacks on the President, from those who have a vested interest in talking the economy down? Or perhaps lingering anxiety over the attacks of September 11, 2001 and the ongoing war on terrorism?

Administration surrogates and supporters can communicate all of the above, and should as often, as eloquently, and as loudly as possible. But ultimately it is President Bush who has to get back into, and remain in, campaign mode for the duration of his remaining time in office and talk up the American economy as persistantly as his foes talk it down. If he doesn't, an artificially (and dishonestly) induced "lack of economic self-confidence [may] become a self-fulfilling prophecy."