The eco­nomic prospects

The Washington Times Weekly - - Commentary -

First, the good news on the eco­nomic re­cov­ery that ev­ery­body loves to hate: Re­tail sales to­tally beat Wall Street es­ti­mates with a huge 1.3 per­cent gain in Novem­ber. Core re­tail sales have in­crease 5.6 per­cent at an an­nual rate over the past three months. Fam­ily net wealth has re­bounded $5 tril­lion over the past six months. Job­less claims keep trend­ing lower. Busi­ness sales, up 1.1 per­cent in Oc­to­ber (the lat­est data), have jumped 10.1 per­cent an­nu­ally over the past three months. And busi­ness in­ven­to­ries, led by man­u­fac­tur­ing, also rose in Oc­to­ber.

The data sug­gest that fourthquar­ter real gross do­mes­tic prod­uct could come in at 4 per­cent or stronger. And the pow­er­ful rise in busi­ness sales — lever­aged off big pro­duc­tiv­ity gains — sug­gest a very strong prof­its pic­ture.

Prof­its are the mother’s milk of stocks and the econ­omy — the only true form of stim­u­lus. Profit naysay­ers ar­gue that only se­vere cost-cut­ting and down­siz­ing have led to bet­ter earn­ings. But the rise in busi­ness sales spells top-line rev­enues — a very pos­i­tive sign.

Th­ese re­cov­ery sig­nals should put some pres­sure on He­li­copter Ben Ber­nanke to stop his free-money poli­cies at the Fed. So should Novem­ber im­port prices, which rose 1.7 per­cent. Driven by the de­clin­ing dol­lar (un­til re­cently), im­port prices have in­creased in eight of the past nine months for a 10.1 per­cent pace.

Econ­o­mist John Ry­d­ing points out that im­port-price trends are closely re­lated to con­sumer-price trends. The mes­sage? Inflation is go­ing to pop up in 2010.

Of course, no­body knows if He­li­copter Ben will be­gin tight­en­ing sooner than ex­pected. But if he lis­tened to mar­ket-price sig­nals — like the sink­ing dol­lar and soar­ing gold — he’d be a smarter Fed chair­man.

No, all is not rosy on the eco­nomic scene. Be­sides the inflation threat, tax rates are go­ing up in Jan­uary 2011. Congress wants to raise the cap­i­tal-gains tax on in­vestor part­ner­ships and el­e­vate the death tax for in­her­i­tance. Both will sup­press cap­i­tal for­ma­tion and en­trepreneur­ship. So will Demo­cratic plans to raise the top per­sonal tax rate as high as 45 per­cent. This is an­other at­tack on the cap­i­tal and in­vest­ment nec­es­sary to fi­nance new and ex­ist­ing busi­nesses.

Pres­i­dent Obama wants a zero cap-gains tax rate for small-busi­ness in­vestors. That’s good. But it’s a small in­cen­tive com­pared to the tax hikes on the ta­ble.

The bot­tom line? We’ll see a mod­est re­cov­ery, per­haps run­ning around 4 per­cent in 2010. But it should be closer to 8 per­cent fol­low­ing the Great Re­ces­sion. Job cre­ation will pick up, and un­em­ploy­ment will de­cline a bit. But the threats of higher fu­ture inflation and taxes will be­come in­creas­ingly trou­ble­some.

The fail­ure of Wash­ing­ton to un­der­stand that cap­i­tal­ism re­quires cap­i­tal is a big dilemma. All this gov­ern­ment spending and plan­ning drains the in­vest­ment that is nec­es­sary for a truly strong and sus­tain­able eco­nomic re­cov­ery.

In the short run, the eco­nomic news is good. In the longer run, we’re star­ing at a Euro­pean-style so­cial­ism-lite model that places gov­ern­ment above pri­vate in­vest­ment. Hence, an­i­mal spir­its may be dulled, along with Schum­pete­rian gales of creative de­struc­tion. A top-heavy gov­ern­ment sec­tor will steadily re­duce the econ­omy’s po­ten­tial to grow and raise the inflation rate as too much money chases too few goods.

Yes, the dol­lar has im­proved in re­cent weeks on the strength of bet­ter eco­nomic data. And gold has sold off about $100. But it’s hard to ex­pect real King Dol­lar con­fi­dence un­less cur­rent gov­ern­ment-spending poli­cies are re­versed.

An im­por­tant USA To­day story about boom times in the Belt­way un­der­scores all this. The pa­per ear­lier this month that the num­ber of fed­eral work­ers earn­ing six-fig­ure salaries ex­ploded dur­ing the re­ces­sion. The num­ber of fed­eral pay caps eased, while pay hikes pro­lif­er­ated — all while the pri­vate econ­omy suf­fered mas­sive job loses.

Ac­cord­ing to Chris Ed­wards at Cato, there are now 383,000 fed­eral work­ers earn­ing six-fig­ure salaries, and 22,000 earn­ing salaries over $170,000. The num­ber of civil ser­vants mak­ing $100,000 or more has jumped over 46 per­cent since the start of the re­ces­sion, and the av­er­age fed­eral worker’s pay and ben­e­fits is $120,000, dou­ble the com­pa­ra­ble $60,000 pack­age in the pri­vate sec­tor. Ed­wards also re­ports that Re­cov­ery Act fund­ing has cre­ated 407,000 gov­ern­ment-con­tract jobs.

All this helps ex­plain why long-term eco­nomic growth is likely to slow to a 2 per­cent zone, rather than cruise in the 3.5 per­cent zone of the 1980s and 1990s. The pri­macy of gov­ern­ment over pri­vate en­ter­prise has been tried and has failed dis­mally.

I re­mem­ber when Pres­i­dent Ron­ald Rea­gan talked about “we the peo­ple,” bor­row­ing from the Pre­am­ble to the Con­sti­tu­tion. To the Gip­per, “we the peo­ple” meant the gov­ern­ment works for us — we don’t work for the gov­ern­ment. It’s our money. And we should get it back through tax cuts when­ever pos­si­ble.

Rea­gan was talk­ing about eco­nomic free­dom. Un­for­tu­nately, that free­dom is be­com­ing a scarce com­mod­ity.

Lawrence Kud­low is a na­tion­ally syndicated colum­nist.

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