Thursday, May 25, 2006

Great American Boom Continued

The greatest story never told continues with the latest GDP report that shows strong growth, low core inflation, and record after-tax profits.

Roughly three years since the Bush tax cuts lowered capital costs and strengthened investment incentives, and about eighteen months after the Fed started tightening its liquidity policy, the American economy remains healthy.

Smoothing out the Hurricane Katrina fourth quarter, with the bounce back in the first quarter, gets you about 3.5 percent growth, slightly more than 2 percent inflation, and a stock market that is undervalued in relation to after-tax profits.

Interest rates are still mild, at around 5 percent for both short and long yields.

It’s a steady economy.

Economic pundits keep telling us about the impending slowdown. Well, they’ve been waiting for a slowdown for years. Actually, I’ve heard about this slowdown for 25 years, ever since Reagan restructured and revived American capitalism through low tax rates, deregulation, and disinflation.

The reality is about 3.5 percent growth since the early 1980’s with very few interruptions. Total employment and wealth creation have soared during this entire span of time.

There’s a lesson here: Tax incentives matter. Price stability matters. Markets are smarter than central planners.

Think of it.