Prosperity on the Supply Side
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By Money Politic$
The supply-side experiment in tax policy continues to succeed. The economy is growing and so are tax collections. An expanding economic pie has put the Laffer curve back in play. Noninflationary growth prospects continue to spread.
The final version of fourth quarter GDP reinforces the view that lower tax rates have greatly spurred economic growth. Over the last six quarters (post-tax cut), the economy grew at a 4.5 percent annualized pace compared to the 2.5 percent pace of the prior six quarters. On a “core” GDP basis (GDP less trade and government), growth has accelerated to 5.6 percent from 3.0 percent.
The “core” GDP measure essentially is the C+I (consumption plus investment) of basic economics. In the fourth quarter, this measure grew by 5.8 percent, a full 2 percentage points higher than the headline 3.8 percent figure.
It is important to note that business investment has been the driving force in “core” GDP growth. Over the past six quarters, business capex (equipment and software in the GDP accounts) has grown at a 15.2 percent annualized pace versus a 1.0 percent pace in the prior six quarters. Consumer spending has ramped up to 3.9 percent from 2.8 percent.
Capital formation has strengthened the foundation for rapid productivity and profits growth while core inflation remains just 2.2 percent.
Profits are the mother’s milk of business and economic growth. Through yearend, after-tax corporate profits were 8.0 percent of GDP, a post-World War II record. The unemployment rate is a low 5.4 percent.
Over the past ten years, the Treasury yield curve spread (the difference between long and short interest rates) has averaged a positive 130 basis points. This was accompanied by 3.3 percent average economic growth and less than 2 percent inflation. Today’s curve is 180 basis points wide, suggesting slightly faster economic growth and only a little more inflation.
Record profits and rapid economic growth are also likely to keep inflation tame. Inflation is caused by too much money chasing too few goods. But more rapid growth produces lower inflation, as more money is absorbed by even more goods and services.
Some economists fret that the boom in energy and other commodity prices will lead to higher inflation and slower growth. But the recent boom in commodities is demand-driven as the global spread of capitalism to China, India, Eastern Europe, and elsewhere is a growth phenomenon, not an inflationary threat.
America’s flexible, low-tax, deregulated, productivity-driven, information technology-based economy is not inflation prone. While a number of economic reforms, such as a flat-tax policy and personal savings account-related Social Security reform would enhance the growth outlook even more, right now the economic picture is a bright one. |
