Wall Street Journal: Less than a year ago, we labeled the current U.S. expansion the "Rodney Dangerfield economy"–because it "gets no respect." Ten months later our now $12.5 trillion economy has only maintained its strength even as it still gets disparaged in the media, which continues to fret about the fragility of what has undeniably been a resilient expansion.
There are a few policy lessons here, assuming Washington is awake.
The 3.5% to 4% rate of growth in 2005 has been especially remarkable given eight Federal Reserve Board interest rate hikes, oil prices as high as $70 a barrel, and one of the most devastating natural disasters in American history. Yes, fourth quarter GDP may come in softer thanks to limping auto sales, but the entrepreneurial U.S. economy will still have grown at about twice the pace of Old Europe in 2005. As economist Michael Darda of MKM Partners, puts it: "This is the most derided and ridiculed growth cycle in post-World War II history, even though by many measures, including productivity and corporate profits, it’s one of the most impressive."
Remember the 2004 debate over the "jobless recovery" and "outsourcing"? Here’s the reality: The great American jobs machine has averaged a net increase of nearly 200,000 new jobs a month this year. Some 4.5 million more Americans are working today than in May of 2003, before the Bush investment tax cuts. The employment expansion in financial services, software design, medical technology and many other growth industries dwarfs the smaller job losses in the domestic auto industry.
Even many of the widely publicized lost jobs at Dephi and General Motors are silently offset by the tens of thousands of Americans employed at new domestic plants built by multinational companies like Honda and Toyota of North America. This job growth has been accompanied from 2001 to 2005 with the best rate of labor productivity over any four-year period since the Labor Department started tracking this statistic. This productivity revolution augurs well for higher wages in 2006.
Critics of the U.S economic model charge that income gains for workers still have not caught up with the losses from the 2000-2001 high-tech collapse. Now they have. The Treasury Department reported last week that "real hourly wages are up 1.1% versus the previous business cycle peak in early 2001." Workers are now earning more per hour in real terms than they did at the height of the 1990s expansion.
The real gains for families have been in the value of their assets. In 2005 Americans owned an all-time high level of wealth (mostly housing and stocks), valued at $50 trillion, according to the Federal Reserve (see chart). Median household net worth is now estimated at more than $100,000. Rather than being overloaded with credit card bills, the truth is that Americans’ assets are rising in value faster than they are taking on debt.
It’s not just the idle rich who are getting richer. It’s the tens of millions in the middle class who could afford to visit malls this brisk Christmas shopping season and purchase cell phones, DVD players, $2,500 flat-panel HDTVs, $400 Xboxes, digital cameras, pink iPods and laptop computers. Hello? This isn’t the buying behavior of people who are feeling poorer.
Looking ahead to 2006, the main risks to another good year are likely to come from policy mistakes in Washington. Higher taxes, energy price controls, anti-Chinese protectionism and incipient inflation are always possible when politicians are in session.
Here’s what’s on our New Year’s wish list. First, soon-to-be Fed Chairman Ben Bernanke will have to establish his hard money credentials by snuffing out the signs of inflation caused by the Fed’s accommodating monetary policy of the last few years. The markets are already testing Mr. Bernanke’s credibility by bidding the price of gold well above $500 an ounce since his nomination. The most important question in the next year is whether the economy’s current momentum will be enough to offset Mr. Bernanke’s necessary attempt to rein in the inflationary expectations that the Fed’s easy-money policy since 2001 has created.
Next, since the investment tax cuts of 2003 were one of the triggers for the surge in asset values, business investment, and job growth, extending the 15% capital gains and dividend tax rates should be Congress’s first order of business. Opponents of those lower rates will moan about "the deficit," but the truth is that those tax rates corresponded with a record $284 billion increase in tax revenues in Fiscal Year 2005 and a $100 billion decline in the budget deficit. We’d also like to see Republicans begin a campaign for a simplified and pro-growth tax reform, with New Europe’s popular flat tax as a potential model.
Finally, it would be nice to see Republicans in Congress start to act as if they truly believe in limited government by putting Uncle Sam on a low-pork budget diet. The most conspicuous blemish on the 2005 economic scorecard was frenetic federal spending, estimated to be up another $180 billion, or 8%. If Congress were to cut that spending growth rate in half, and if the economy continues to spin off tax revenue dividends as in 2005, the budget deficit would fall in half by this time next year. And, then, who knows, the pessimists may run out of things to complain about and this expansion might finally get the respect it deserves.