Inside the business boom is the productivity revolution of the Google/Internet economy, where output per hour has grown at a 3 percent yearly rate for 10 years. Cynics derided the Internet revolution when the bubble burst 5 years ago. But it turns out that the Internet survivors are now huge influences on the communication platforms, information content, and distribution channels that are remaking the way businesses and families live and work.
True, inflation has worried many in recent months. Nevertheless, core inflation remains tame and interest rates are at four-decade lows. The recent gold rally suggests that the Fed has a few more rate hikes in store, but as the Dow Jones approaches 11,000, stock markets are predicting an imminent end to the Fed tightening cycle. Meanwhile, bond market indicators suggest that future inflation over the next 5 to 10 years will be just as tepid as core inflation is today.
Perhaps one of the biggest economic surprises is the U.S. greenback, which has regained its strength in the currency markets. This isn’t simply because American interest rates have risen with the economic cycle. It’s mainly because the U.S. economy is throwing off high investment returns that attract foreign capital from around the globe (where free-market capitalism, by the way, continues to spread at a breathtaking pace).
With Congress moving toward new budget restraints, the fiscal year 2006 budget gap may well come in below last year’s deficit, even with the new Katrina spending. This is a function of a healthy economy that has been throwing off tax-revenue surprises ever since lower tax rates were put in place two years ago. So the question is: Why would any Republican member of Congress want to upset this abundant economic applecart?
Under current policies the economic boom can last for many more years. Hence, the after-tax rewards for work, investment, and risk taking that are so essential to this prosperity should be renewed and extended without a second thought. The GOP should also launch a new round of pro-growth tax reform to flatten tax rates, broaden the income base, and vastly simplify the dreaded IRS tax code.
Republicans in Congress must strike while the iron is hot, adding to pro-growth policies and expanding their economic-growth coalition. There’s really only one question a GOP lawmaker can be asked these days: You gonna be smart, or stupid?