Columnist.
After delivering a number of "economic growth" speeches this summer, President Obama has failed to inspire any confidence, falling all the way back to square one in a recent Gallup poll. Actually, make that less than square one. Gallup reported that Obama's approval rating on the economy has sunk to 35 percent in August, from 42 percent in early June. Why should we be surprised?
With Detroit filing for Chapter 9 bankruptcy, everybody knows major root-canal cutbacks are coming. Cutbacks of out-of-control government spending, pensions and health benefits. *Major cutbacks.* We know that. We also know that the downfall of Detroit is *again* proof positive that the public-union collective-bargaining model has utterly failed. Unions just loot the benefit lockbox at taxpayer expense. That was the message of Gov. Scott Walker's victorious crusade in Wisconsin. If any good comes out of the Detroit debacle, it will be the spread of that message across the country.
No matter how many monetary officials try to sugarcoat it with damage control, the fact remains that the Ben Bernanke Fed wants to end its quantitative-easing bond-buying operations over the next year. That was Bernanke's statement at his last press conference, and I've seen nothing to contradict it. As everyone knows, stocks and bonds collapsed right after Bernanke let the cat out of the bag. Fortunately, markets have stabilized since then. But my hunch is that unless the economy really falls back into a quasi-recession, the Fed is going to go ahead and end its bond purchases.
In the aftermath of Ben Bernanke's announced timetable for ending Fed bond purchases, long-term interest rates have jumped up, while stock prices have cratered down. As I wrote Friday, I think the Bernanke plan is premature -- especially in a 2 percent economy with falling inflation and inflation expectations. But just to get a little wonky on the interest-rate story, it's noteworthy that 10-year Treasury notes have moved up about 70 basis points year to date. Currently they're around 2.50 percent.
Without intending to -- and perhaps without even realizing it -- the normally cautious Fed head Ben Bernanke may have launched a major tightening policy during his news conference on Wednesday. The de facto policy shift immediately sparked a rout on Wall Street, with stock, bond and gold prices all plunging. And it's going to shake up confidence even more, perhaps even slowing the already anemic recovery. Bernanke has stumbled into a major policy mistake. While Wall Street was debating about exactly when the Fed would slow its quantitative-easing bond-buying program, Bernanke set out a plan to completely end the new cash-generating QE in roughly one year or less.
When President Richard Nixon collided with the Watergate scandal, he was a very unpopular man. The nation at the time was suffering one of the worst recessions in history and one of the highest inflation rates, too. So Watergate sunk Dick Nixon, but for good measure, the economy sunk him even more. Roughly 25 years later, Bill Clinton was impeached because he lied about his affair with Monica Lewinsky. But despite his personal transgressions, he never really lost his popularity. Why? The economy was roaring. So you might say scandals are less scandalous during prosperity and more scandalous during recession.
Apart from criminal prosecution, the best way to strip the power of politics and corruption from the IRS is to initiate broad-based, pro-growth tax reform and simplification. It's the complexity of the tax code that nurtures the corruptness of the IRS.
When you get right down to it, the political targeting and stalling of tax-exempt applications by the IRS was an effort to defund the tea party. Rick Santelli, one of the tea party founders and my CNBC colleague, was the first to make this point. I've taken it a step further: The IRS was taking the tea party out of play for the 2012 election, as it looked to avoid a repeat of 2010 and another tea party landslide.
At the end of the day, the battle over immigration reform is not about dollars and cents. It's about the soul of a nation. President Reagan reminded us that America must remain a "beacon" and a "shining city on a hill" for immigrants who renew our great country with their energy, while adding to economic growth and prosperity. And here's a quote from Jack Kemp: "Americans and immigrants share the same value of work, family and opportunity. There is no reason to fear the newcomers arriving on our shores today. If anything, they will energize what is best about our country."
The really good news from April's employment report is that all the pessimistic, end-of-the-world, spring-swoon forecasters were wrong. It wasn't a fabulous report. But it handily beat Wall Street expectations. Stock markets soared on the news. The bad news, however, is that the U.S. continues to fall further behind its own long-term trends for jobs and economic growth. And lately, hours worked -- a key labor measure -- have begun to fall. First the good: Nonfarm payrolls rose by 165,000 last month, with private payrolls up 176,000. And the prior two months were revised higher by a net 114,000. The unemployment rate fell slightly, from 7.6 percent to 7.5 percent.
In the last two days, gold has plunged so deep that it's being called the worst drop -- at least in percentage terms -- in 30 years. That brings us back to the early Ronald Reagan period, when falling gold was regarded as a *good* thing. Back then, lower gold showed inflation coming down after the horrible 1970s. It also showed confidence in the economy recovering and greater respect for the dollar. Over the next two decades, in the '80s and '90s, gold basically dropped in round numbers from $800 an ounce all the way to $250. Stocks soared. So did jobs and the economy. It was one hell of a good period.
No matter how you slice the Obama budget pie, the inescapable fact is that the president wants to get rid of the roughly $1 trillion budget-cutting sequester and substitute in a $1 trillion-plus tax hike. In other words, more spending, more taxing. Growth-busting. The GOP should just say no.
Many profound and detailed admiration pieces will be written about the late Margaret Thatcher, and they'll be much deeper than this one. But I want to get on record with my own esteem for Thatcher, whose character, philosophy and achievements made her one of Britain's greatest prime ministers. Way back in the early 1990s, at a National Review conference on the Eastern Shore of Maryland, I had the great honor to serve on an economics panel that Thatcher moderated. (Paul Craig Roberts was also on that panel, although I can't remember the name of the third panelist.) The topic was free markets and freedom, areas in which Margaret Thatcher made huge contributions, so I had a lot to live up to. And how did it go? Well, following the discussion, I got to sit next to Thatcher during the luncheon. And she told me, "You know, Kudlow, you did rather well in that talk." Naturally, I was thrilled.
Apropos of my column of a week ago -- "Has Bernanke Gotten the Story Right?" -- this week's paltry gross domestic product revision again backs up the actions of the Federal Reserve chairman and his market-monetarist supporters. Real GDP was a miniscule 0.4 percent at an annual rate for last year's fourth quarter, up from an earlier estimate of 0.1 percent. Perhaps more to the point, the year-on-year GDP change is only 1.7 percent, less than the 2 percent average growth of the Obama recovery, which is still the weakest in modern times going back to 1947. Inside the report, there was good strength in housing investment (17.6 percent), business equipment (11.8 percent), and business structures like factories and warehouses (16.7 percent), all in annual rates for last year's fourth quarter. Consumer spending, however, was a rather soft 1.8 percent.
The most important point in Ben Bernanke's Wednesday press conference was the announcement that the Fed will adjust the amount of monthly bond purchases according to economic conditions. In other words, an improving economy with stronger payrolls and lower unemployment could lead to a decline in Fed bond buying, from $85 billion a month to something gradually lower, so long as the economy keeps looking better. It won't happen all at once. The Fed is not convinced that the current economic upturn is truly sustainable. But Bernanke is implying that the Fed may become *less* easy in the second half of this year, perhaps ending QE in 2014.
You might not know it from the acrimonious political debate on cable and broadcast TV, or on talk radio, or on websites and blogs. But here's a counterintuitive observation: Amidst all the negativism out there, I believe *optimism* is in the air. That's right. *Optimism.* Sometimes you have to search for it, or read it in the fine print. But I believe the political economy is getting better, not worse. Let me make a few points to defend what most folks believe is an indefensible position.
President Obama may be backing away from his doomsday spending-cut predictions as the sequester goes into place. But the new party line is that while there will be no impact in the first few days, there'll be a slow, downward slump after that. What, are we to believe that lower spending and smaller government *damage* the economy? Doesn't that run counter to virtually every reasonably objective study in recent years -- including ones from a number of U.S. academics and the Organization for Economic Cooperation and Development in Europe -- that describe how countries with lower government spending grow more, and how countries with higher government spending grow less?
The Obama administration is whipping up hysteria over the sequester budget cuts and their impact on the economy, the military, first providers, and so forth and so on. *Armageddon.* But if you climb into the Congressional Budget Office numbers for 2013, you see a much lighter and easier picture than all the worst-case scenarios being conjured up by the administration. For example, the $85 billion so-called spending cut is actually budget authority, not budget outlays. According to the CBO, budget outlays will come down by $44 billion, or one quarter of 1 percent of gross domestic product (GDP is $15.8 trillion). What's more, that $44 billion outlay reduction is only 1.25 percent of the $3.6 trillion government budget. So the actual outlay reduction is only half the budget-authority savings. The rest of it will spend out in the years ahead -- that is, if Congress doesn't tamper with it.
By far the best line from this week's dueling State of the Union messages came from Florida Sen. Marco Rubio. Nice and simple, and right to the point: "Presidents in both parties -- from John F. Kennedy to Ronald Reagan -- have known that our free-enterprise economy is the source of our middle-class prosperity." That's a brilliant summary of pro-growth policies, on the supply-side and in a free-market context. Kennedy slashed tax rates and held down the budget. So did Ronald Reagan, who borrowed Kennedy's ideas: smaller government, lower tax-rate incentives and a thriving middle class, where the economic pie grows ever larger.
