Rounding the Corner

3 November 2003


America's Economy Grows 7.2%

Last week's economic data may just be the proof businesses need to start the long awaited hiring boom. GDP for the third quarter of the year grew at 7.2%, which is the biggest result since 1984, when Mr. Reagan's recession was ending. On top of that, joblessness dropped to 6.1% with 57,000 jobs added to payrolls in September. Which only proves that deficit spending at record levels eventually causes some expansion.

Back when there were two towers in lower Manhattan, Mr. Clinton was under attack for cheating on his wife and lying about it, and when Mr. Schwarzenegger was merely a movie star, the US government was running a budget surplus. The big fight on Capitol Hill was what to do with all of the money -- give it back to the tax payers with huge tax cuts or spend it on the tax payers with infrastructure improvements and social programs.

Less than one Republican presidency later, the US budget deficit is around the half-trillion mark -- so much for the GOP being the party of fiscal responsibility. At the same time, though, the recession and the Al-Qaeda attack required an expansionary fiscal policy. This was all the more so because the Fed had managed to lower interest rates so far that it was running out of room to maneuver monetary policy.

The result of interest rates near zero and record levels of deficit spending is the current growth. What some "experts" are warning, though, is that this can falter, that next quarter there will be some leveling off (or even a reversal). They are correct that this level of growth in a mature economy like America's is unsustainable in the long-run. Eventually, America will go broke engaged in this policy as the economy overheats. And that is why interest rates and taxes will have to rise as this economic recovery takes hold.

Of course, had investors not believed all the non-sense about the "new economy," had Mr. Bush not handed out money to the ultra-rich (which they promptly misinvested in the bubbling stock market) and had the intelligence services and the White House not been asleep at the wheel on September 11, 2001, the recession might have been a mild one, instead of the worst since the Great Depression.

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