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The Economics of a GOP Gubernatorial Sweep

Thursday, 05 Nov 2009 09:32 AM

By Larry Kudlow

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Against the backdrop of high unemployment and a public revolt against a Democratic health-care bill — which would significantly increase taxes, slash Medicare spending, and massively raise health-care spending elsewhere in a government takeover of our leading growth sector — the Republicans swept the Virginia and New Jersey gubernatorial races.

It's interesting that early signs of economic recovery are not helping the Obama Democrats. This is largely because of the 9.8 percent unemployment rate, which is expected to move higher. Even the crazy jobs-saved-or-created campaign is having no discernable impact while the Obamacons try to fight the unemployment rate.

If you go to recovery.gov, the official stimulus Web site, you'll find that there has been $207 billion in stimulus spending through Oct. 30, 2009 — including $84 billion in tax benefits, $52 billion in contract grants and loans, and $71 billion in entitlements. So even if we give my friend Jared Bernstein his highly flawed "1 million jobs saved or created," that's $207,000 per job in an economy where the average wage is about $46,000. Not good. Wasteful and ineffectual spending. (In reality, tax credits are spending. For incentivizing, you need marginal tax-rate cuts.)

Mike Flynn of Breitbart's biggovernment.com notes that the government pumped $170 billion into the third-quarter economy. But gross domestic product grew by only $150 billion. As I said, ineffectual spending.

That doesn't mean the economy isn't rebounding. It is. Glitches and all, third-quarter GDP popped up 3.5 percent at an annual rate after inflation. Statistically, the recession is over. That's good. And it corroborates the big stock market rally over the past seven months.

This is going to be a business-led recovery as self-correcting firms build profits on top of huge cash flows.

Yesterday's ISM manufacturing report for October also confirms the growth trend with a recovery reading of 55.7, the strongest since April 2006. And this morning's factory orders for September also show a stronger-than-expected gain. Even car sales are expected to rise in October by more than 10 million, at least 1 million better than September. Ford, which refused to take TARP bailout money, reported a surprise increase in profits.

But the depreciating dollar remains a storm cloud over recovery. So are scheduled tax-rate increases and healthcare legislation that will slam individuals and firms with higher tax burdens and higher tax costs for job creation.

And then there's the Federal Reserve. With gold up another $25 — setting a new nominal record of $1,079 — the Fed released a policy statement Wednesday that continues a program of massive money-pumping and a zero interest rate.

This whole Obama policy mix of huge government spending and a depreciating greenback is all wrong. It's pro-inflation, not pro-growth. For a true economic recovery, we need a stable King Dollar and lower marginal tax rates to incentivize job creation.

Jimmy Pethokoukis and others have noted that the first recovery quarter under Ronald Reagan was better than 8 percent, not 3.5 percent. In fact, the average real GDP growth rate for the first quarter of the 10 postwar recoveries is 7.3 percent.

So the economic-recovery story, and even the stock market rally, won't bail out the Obamacons today, although it remains to be seen whether a free-market, anti-tax-and-spend message will emerge from the election sweep by the GOP. If so, it could doom the so-called health care reform that has become a symbol of the leftward-tilting, big-government, economic-control policies emanating from Washington.

To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

COPYRIGHT 2009 CREATORS.COM

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