Pres. Bush gave a major economic speech in New York today touting his plan for a balanced budget at prevailing low tax rates, in order to extend the economic boom that began in 2003. He also pushed hard for free trade as he did yesterday in Peoria, Illinois at Caterpillar, Inc.
Though Mr. Bush never gets any credit for the strong economy, reality is that economic growth continues to surprise everyone. Today's real GDP report came in at 3.5 percent at an annual rate for the October-December period in 2006.
Price inflation inside the report was very low around 2 percent with one major price gauge actually declining for its biggest drop in 52 years. For the whole year, GDP advanced 3.4 percent following 3.2 percent last year, 3.4 percent in 2004, and 3.7 percent in 2003.
The highly diverse and resilient American economy has not been derailed by a temporary housing slump, which occurred last year following many years of outsized gains. Excluding the drag from housing investment, real GDP growth in the 4th quarter was 4.8 percent and was 4.3 percent for the year.
The strong investor class stock market has been signaling high growth in the economy for quite some time and high growth is coexisting nicely with low inflation. Hopefully, the Ben Bernanke Fed is watching this carefully.
Both the late Milton Friedman and supply-side guru Art Laffer have taught us that inflation occurs because too much money chases too few goods. However, as the Fed has throttled back money supply growth, the continuing gain from more production of goods and services has actually reduced inflation (helped by falling oil prices). So more output chasing slower money growth is a prescription for contained inflation.
The so-called Phillips curve tradeoff between falling unemployment and rising prices has once again been disproven. Right now the Fed has no reason to tighten or ease its policy. Low tax-rates are promoting growth while monetary control is holding down inflation. Continued free trade will also promote economic growth.
Mr. Bush is on the right track as he follows classical supply-side economic principles. He deserves a better polling fate for this achievement. Be that as it may be, the Goldilocks economy, not too hot and not too cold, continues to defeat all the pessimists and nay-sayers out there.