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July 8, 2006
Kudlow Overplays A Winning Hand

Larry Kudlow takes issue with the media for underreporting and distorting the Bush administration's record on the economy in his Townhall column today. Kudlow has an excellent point, as media outleys have all but ignored the Bush economic engine and the tax cuts that fuelled it. Unfortunately, Kudlow distorts it himself in an attempt to gild the lily:

Did you know that just over the past 11 quarters, dating back to the June 2003 Bush tax cuts, America has increased the size of its entire economy by 20 percent? In less than three years, the U.S. economic pie has expanded by $2.2 trillion, an output add-on that is roughly the same size as the total Chinese economy, and much larger than the total economic size of nations like India, Mexico, Ireland and Belgium.

This is an extraordinary fact, although you may be reading it here first. Most in the mainstream media would rather tout the faults of American capitalism than sing its praises. And of course, the media will almost always discuss supply-side tax cuts in negative terms, such as big budget deficits and static revenue losses. But here's another suppressed fact: Since the 2003 tax cuts, tax-revenue collections from the expanding economy have been surging at double-digit rates, while the deficit is constantly being revised downward.

For those who bother to look, the economic power of lower-tax-rate incentives is once again working its magic. While most reporters obsess about a mild slowdown in housing, the big-bang story is a high-sizzle pick-up in private business investment, which is directly traceable to Bush's tax reform. It was private investment that was hardest hit in the early decade stock market plunge and the aftermath of the 9-11 terrorist bombings. So team Bush's wise men correctly targeted investment in order to slash the after-tax cost of capital and rejuvenate investment incentives.

The move paid off. Investors now keep nearly 50 percent more of their after-tax capital returns -- an enormous increase that has resulted in a remarkably profitable and highly productive business sector. While the overall economy has grown by one-fifth since mid-2003, private business investment has expanded by 37 percent.

Much of what Kudlow says here is true, but the specific numbers he uses are suspect. As Instapundit and his readers point out in a post this morning, Kudlow uses actual dollars rather than figures adjusted for inflation. The uncorrected projected GDP for 2006 based on Q1 numbers is $13.042 trillion, while the projected GDP for 2003Q2 was $10.844 trillion. The difference comes to slightly less than $2.2 trillion, which indeed gives a 20% growth rate -- with inflation.

However, most economists use figures adjusted for inflation based on a specific value year; the BEA, where Kudlow got his numbers, uses 2000 as a basis year for adjustment. Those numbers still tell a compelling story, but not as dramatic as Kudlow's figures represent. In adjusted dollars, 2006Q1 projected GDP came in at $11.403T against 2003Q2 projected GDP of $10.230T, leading to a growth rate of 11.4%.

The reliance on nonstandard calculation detracts from an already strong argument -- Kudlow does not do any great service to Bush with this decision. The numbers, adjusted for inflation, are already compelling. The eleven-quarter period that Kudlow highlights ranks well in the last quarter-century. The Clinton administration had a run of such periods, starting in 1998Q1 through 2000Q3 (with each quarter showing this type of growth). Reagan had a similar run, between 1984Q3 and 1986Q3.

As King Banaian pointed out during our radio show, however, the Bush administration's run has some remarkable differences. First, neither Clinton nor Reagan had a shooting war going on during these periods, allowing for more stable economic environments. Second, oil prices dropped during these periods for Clinton and Reagan, while they have increased considerably during the Bush expansion. Yet the Bush expansion, fuelled by the tax cuts, has shown remarkable stability and consistency. In the past eleven quarters, the only one below an annual rate of growth of 3% was 2005Q4, which reflected the economic impact of Hurricane Katrina. Also, we should recall that the Clinton era coincides with the dot-com bubble and the bulk of the investor frauds of Enron, Global Crossings, and Worldcom.

In fact, in Bush's entire tenure in office, he has only had one quarter of economic loss where he was president for the entire quarter -- and that was 2001Q3, when he ordered the entire airline industry grounded as a result of 9/11, as well as the devastating losses in Manhattan in both lives and property. Even then, the loss was kept to an annual projected rate of -1.4%. (Clinton only had one as well, in 2000Q3, and the two share another, 2001Q1.)

As to the claim that the American economy grew more than the entire Chinese economy, that also requires a bit of sleight-of-hand to believe. First, again we have to accept the unadjusted numbers from Kudlow rather than the adjusted numbers economists normally use. Second, we have to accept the Chinese GDP at their exchange rate -- which the US continually protests as set artificially low as a barrier to American products. The CIA factbook on China shows the GDP at their exchange rate as $2.25T, slighly more than the gap for the unadjusted American GDP increase. However, the purchasing power parity GDP comes in at $8.86T, more than three times the official GDP and much larger than our GDP increase, unadjusted or adjusted. (We grew in real terms amost as much than the Russian economy in its entirety, though.)

The Bush economy has never been reported well by a media culture clearly biased against the White House. Kudlow is correct on that point. He should have stuck with the commonly-accepted figures rather than undermine the argument he made about mainstream media distortion.

Sphere It Digg! View blog reactions
Posted by Ed Morrissey at July 8, 2006 3:57 PM

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» NY Times debunks Dems' false claims about "tax cuts for the wealthy" from The Unalienable Right
Via The NY Times: An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief... [Read More]

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» Good Economy...Bad Economy from GZ Expat, Part II
For whatever reason, the media really don't want to report the situation of the economy and the growth the Bush tax cuts have had. From Larry Kudlow...Did you know that just over the past 11 quarters, dating back to the June 2003 Bush tax cuts, America... [Read More]

Tracked on July 9, 2006 12:52 AM


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