With a spate of positive numbers on jobs,GDP, business investment, consumer confidence and family net worth, the US economy looks very healthy. Do you agree?

I agree that the foundations of today's economy are strong because of the superb supply-side tax cuts enacted in '03 and '04 by President Bush, with the help of House Ways & Means Chairman Bill Thomas.

I am, however, worried about 2 things: 1) the threat of a military confrontation with Iran, which is inceasing global geopolitical risks and sending gold sky-rocketing; and 2) the Fed responding to rising gold prices by raising the funds rate higher than the currently expected 4.5%, which is fundamentally an anti-growth policy approach.

Ben Bernanke will have his work cut out for him when he takes over at the Fed. The best policy approach would be to sell Treasury bonds to soak up the excess liquidity in the economy, which is being represented by $525 gold.

To be sure, there were a number of favorable developments this month and I'm more optimistic than I was. But there are some mixed signals from housing, and it seems that the Fed is determined to keep raising rates until the news turns bad. If they stick with that program long enough, the economy will eventually turn south.

The numbers are good. Even the latest life expectancy numbers for the US are up and infant mortality is down. That doesn't stop the doom-and-gloomers from finding the dark lining in the sunny cloud. And the macro numbers are always prone to the worriers complaining about this piece or that piece. But overall, things look good.

Paul, I don't agree that the tax cuts are the key to economic growth in the current setting. It doesn't make sense to be trying to stimulate the economy with fiscal policy and contract with monetary policy. What we need is more saving (both national and private saving), and I see no evidence whatever that tax cuts are getting us that.

To Jim Hamilton especially, are you worried about an inverted yield curve and economic slowdown?

James, I assume that you think the Fed should slow down the economy to tame inflation. Is that right?

Iran is an issue, but Israel is likely to spring into action before the US. The President of Iran seems to be inviting Israel to take him out. First, he suggests Israel should be wiped off the map. Then yesterday he's quoted saying that the Holocaust, if it is true, (of course he's a skeptic), but if it is true, Europe should take in the Jews and create Israel there. For some reason he wants to be attacked by Israel. I guess he figures that's better than being attacked by the US or it's good for domestic politics. But even if it's Israel, it will roil the region.

Let me quickly jump in on the first question: The economy is definitely strong and robust. The Dow is brushing up against 11,000 for the first time since 2001, unemployment is low and all of this includes the discounting of the war on terrorism, the war in Iraq, and the egregious spending in Washington.

Russ, I wholly agree. Ahmadinejad's insane remarks are a danger to diplomacy.

Larry, the long rates have managed to barely keep ahead of the short so far. But with another 75 basis points in the funds rate likely in the cards, we could see the yield curve invert within a few months. I think its current narrowness is already a signal that the Fed has been contracting too quickly. I would prefer to see something more "measured" about this "measured pace."

Paul, no, I don't think that solid real growth is necessarily a reason for the Fed to contract. It is an indication that so far, they haven't upset the applecart. But there are often delays of 6 months or a year between the time the Fed tightens and the time the economy responds. We may already be poised for a slowdown as a result of what they've done. Waiting to see monetary policy show up in the current unemployment rate is asking for trouble.

Andy Roth, don't the new wealth numbers from the Fed show that the tax cuts are working? Aren't those wealth numbers, up $12 trillion since 2002, a 31% gain, the real saving rate for the economy? And, how do you handicap Senate passage of the investor tax cuts?

James, I agree that the Fed raising rates is slowing growth at the margin. If the Fed does stop, the market would rally, portending an increase in future GDP growth.

James, I'm a little more optimistic about the tax cuts encouraging savings at least the way I've seen them described. Any time the press describes something as "good for rich investors" it usually means a more lenient treatment of capital which usually means encouraging savings. I agree that we should encourage savings. The crazy thing being done now is that Washington and Sacramento and the rest of the state capitals are spending too much money. Whether it's financed by taxes today are tomorrow (a deficit) is less important than how much of our nation's resources are being allocated by politicians and too little by human beings with knowledge about their lives that Washington cannot ever know.

The negative personal saving rate is another area of concern.

Absolutely. $12 trillion in new wealth with $4 trillion in new shareholder wealth. Those are amazing numbers and yet there are some lawmakers in Washington who are convinced that the cap gains and dividend tax cuts aren't working.

Passage in the Senate is going to depend on the squishy moderate Republicans. Folks like Snowe, Collins, Chafee, etc. Chafee is facing a tough primary challenge so his vote will be important. I think the chances are better than 50%, but even then the tax cuts will only extend to 2010. They need to be brought down to zero permanently.

Negative personal savings rates are not a reason for concern when Americans are wealthy (household balance sheets are strong). Low savings rates are a sign of economic vitality.

Well, I don't understand this philosophy of advocating tax cuts when the spending cuts don't materialize. If Congress just follows half of your advice (cuts taxes but not spending), I don't think that the net impact of your policy advice has been positive. Looking at what's realistic from this Congress and President and political situation, I think the primary effect of tax cuts is to increase the deficit and reduce national saving.

Andy's right on the money.

Russ and James, you are spot on regarding public spending. The sausage factory in Washington DC is grinding out some awful stuff lately and most of it is going unnoticed. The House just reauthorized the Terrorism Risk Insurance Act, which was set to expire at the end of this year. This, of course, was supposed to be a temporary program, but like Reagan said, government programs are the closest things to eternal life. This program, which distorts the market and creates waste, will cost us $1-2 billion!!

Russ, did you see Bob Novak's column on a new stealth tax for oil companies? Taking away their foreign earnings tax credit will cost $5 billion, on top of the $5 billion inventory tax? Isn't this going to reduce energy investment and production, keeping prices high and hurting consumers?

James, balancing the budget by reducing spending at the expense of making permanent the President's tax cuts would be a mistake. It would slow the economy and weaken the dollar.

It's true that capital gains can form the support for a negative personal saving rate. But one of the implications of the negative personal saving rate is that as interest rates rise and mortgages become more burdensome, we could see spending drop pretty precipitously. Furthermore, you need a flow of real goods (not just paper capital gains) to finance the physical investment that we need to ensure future economic growth.

You might be right, James. The spending cuts are always meager. The question is whether they would any different without the tax cuts. The key is cutting rates rather than revenues. If you can cut rates and encourage savings and growth, that's very different from handing out a rebate. But you're right in the sense that increasing spending is a tax increase regardless of what happens to revenues. Wouldn't it be wonderful to have a President and a party that understand that spending is the true tax on the economy. I'd even settle for a President who knew where the veto pen is located. Is it a secret that President Clinton forgot to share with his successor?

Paul, I don't want to balance the budget right away. My preference would be to stop the deficit from growing in real terms, and let economic growth do the work.

But, James, a balanced budget with an enormous public sector is the road to Europe. That's a road we don't want to get on. The key isn't the deficit. It's spending.

Larry, great point about the stealth windfall tax. The lawmakers in Washington are using the Constitution as a door mat to come into our homes and take our wallets. They pass the stealth tax and then overwhelming defeat the true windfall tax to "show the world" that they aren't a bunch of meanies (but, in fact, they are). Same thing regarding the Bridge to Nowhere. They defund it, but Alaska still gets the money. "Success, we have tricked the public, now let's spend some more," they say.

A lot of smoke and mirrors.

Russ is right. The deficit is a symptom, not a disease.

I still don't understand how cutting taxes without lowering spending is supposed to help the economy.

It helps the economy by increasing productive enterprise, thereby increasing growth and the tax base. Laffer Curve economics.

But Paul, my point is that investment spending is the key to increasing productive enterprise. And that is not helped at all by the combination of monetary tightening and fiscal stimulus.

Yearend questions du jour: a) will 2006 econ stay around 3.5%; and b) will this bail out the GOP Congress in mid-term elections come November. Or, which is better for taxpayers, a split Congress or a GOP Congress?

Right on, Paul. Regardless of spending, it's imperative that we cut taxes until we reach the Optimal Laffer Curve Tax Rate. That means zero capital gains taxes, zero dividend taxes, zero corporate taxes, and an overhaul of Social Security and Medicare.

James: Agreed, monetary tightening slows growth. But if the Fed is completely intent with raising rates further, we should hope for more help from the fiscal side (ie tax cuts) to help sustain 4% GDP growth.

Larry, I did see that Novak column and my eyes glazed over after the first two grafs. Who wants to read about changes in energy accounting. You are to be saluted for actually reading it. Andy points out a related problem. Not enough people are paying attention. Mea culpa. To encourage people to pay attention, you have to make it easy or entertaining or both. The biggest philosophical problem we have today with government is government's desire to micromanage this industry or that one with this tweak or that yank while ignoring the intended or unintended consequences that inevitably follow. Hayek said it best: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." Failing to understand this insight is the problem with the nation's energy policy, telecom policy and health policy just to take a few examples. Fiddling with energy policy is unlikely to make consumers better off. My hope is that the price of gasoline will come down a little bit more and politicians won't feel like they have to show they care about us.

I expect slower than 3.5% growth for 2006, Larry. I'm worried about housing and autos. And as for taxpayers, I agree with the others that it's spending that defines the ultimate burden on taxpayers. The GOP Congress doesn't seem to have figured out how to keep the spending under control.

I'm counting on Bill Thomas to come up with some excellent tax cut ideas in '06. It'll be his last year on Ways & Means and he's one of the birghtest supplys-side legislators. If he succeeds, then the GOP will greatly benefit in mid-term elections.

As for monetary policy, I'm afraid that if the Fed does not stop at 4.5%, then the bias in GDP numbers will be towards 3 - 3.5% growth.

Russ: was that part of Hayek's "fatal conceit"?

Going back to post #34. Andy Roth has great ideas. The optimum cap gains rate is 0%. Even Alan Greenspan has argued that.

I have no idea what growth will be this coming year. But my guess is that the biggest effect on growth and the mid-term elections will be what happens in Iraq. If it's quiet or improves, people will feel better about taking risks with their money and re-electing the status quo. If it gets worse or if there a terrorist attack on US soil, the economy will cough. Either way, I think the Dems need a strategy for Iraq and terrorism if they hope to profit from the turmoil.

Russ, you're sure right about energy policy. It's amazing to see the range of bad proposals we're getting on that from politicians of all stripes. The idea of this summer's energy bill that what we really need is a huge new subsidy for corn growers is pretty embarrassing.

Great question Larry. The GOP should hold onto both chambers, but if I had my druthers, I would want a lot of turnover regardless of party affiliation.

That said, the Democrats could sweep the elections tomorrow if they wanted to. The GOP's right flank is totally exposed.

And Paul, you are too kind to Bill Thomas. He balked on Social Security reform. He preferred to not force a vote on the moderates. That's a big no-no for me.

Yes, Larry, that is what Hayek called the fatal conceit from the book of the same title. The Road to Serfdom is his most famous book. But the deepest insights are in The Fatal Conceit. Unfortunately, it is not light reading. But hey, at least it's short.

I think Social Security reform was flawed in that it wasn't wrapped up with more suppply-side tax cuts.

The last social security reform package mostly increased returns on labor, but we need to increase returns on investment too. That's critical because as the baby boom generation grows, the shrinking pool of laboreres will need to become wealthier to pay for their share of retirees.

Paul: in the Mundell-Laffer model, wasn't it low tax-rates to spur growth and tight (or steady) money for price stability? But I'm worried that without serious budget-cutting tax-rates will go up in future years and economic growth will go down. That will worsen the budget deficit. Stock and real estate wealth will get clobbered as tax penalties discourage work, saving and risk-taking. Bye, bye to animal spirits.

Paul, I see Medicare as an even more important issue to address than Social Security. That's where some long-run strategic thinking and boldness are called for. Of which the prescription drug benefit was not an example.

I don't doubt that one bit, Paul. Social Security reform, in my mind, would have been Bush's lasting legacy. Perhaps even greater than his leadership on the war on terror. Tax cuts would have been a great complement to reform, but the White House has no salesmen. Bush should have been saying to the press, "We're not going to talk about anything except Social Security for the next 15 days. And the moderates are going to have to vote."

Andy, the problem with social security reform is that the average person isn't panicked yet so the political return to going out on a limb isn't there. It will happen. It's only a matter of time and a matter of how 'private' the privatization will ultimately be. Bush also bailed quickly. But when it passes around 2020, he will get credit for being the first President to come out in favor of it.

Larry, yes, we need to cut the fat in government spending. The GOP must do this right away. At the same time, the GOP must concentrate on promoting a 0% cap gains rate. Imagine the boom, and the tax revenues that would flow into Treasury to pay for the deficit.

In addition to this, it is critical to stabilize the dollar, and no one in Congress is talking about it. If the GOP in '06 mentioned stabilizing the dollar with respect to gold, they could sweep the elections again, all other things being equal. The electorate is hungry for it.

James, you're right about Medicare. It's a looming monster too.

Russ, it's tragic that the public hasn't responded, but you're right. It's because they don't feel the pain yet. It saddens me horribly that we can't fix problems before they arrive.

For better or for worse, Paul, the average American doesn't know anything about gold. Heck, I don't even know anything about gold. So I doubt it's going to be a winning position.

Paul, I feel a new political party stirring in the background. The platform would be, "Get Rid of the Capital Gains Tax and Bring Back the Gold Standard". That would be a dream.

Jump ball question for everyone: is the Google internet economy and its productivity revolution here to stay? Isn't this just about the most important trend for growth and prosperity and real wages?

Don't be depressed, Andrew. There is a virtue in not looking to far ahead and that's that a lot of bad solutions are never implemented. Samuel Johnson said "When a man knows he is to be hanged in a fortnight, it concentrates
his mind wonderfully." There is something to be said for solving problems with a focused mind. When Social Security and Medicare head south, we'll focus on them. And if we don't mess up too badly, we'll have a lot of wealth to use in solving the problem.

Russ, I completely disagree. The public understands that before 1971, the American standard of living was more stable. The post-Bretton Woods era is extremely volatile, economically and socially speaking. I don't think you're giving the American people enough credit on this one.

I'm with Andy: this is a wining issue. We just need to give them a chance to vote on it...

As far as gold is concerned, the world tried in the 1920's to return to a gold standard as a cure for the fiscal and monetary instability that many countries were experiencing. That proved to be a disaster. Because the doubts persisted, there was a big appreciation in the price of gold (which forced countries that stayed on the gold standard into a very destructive deflation) and speculation against currencies, which in my opinion contributed to the severity of the Great Depression. Trying to go on a gold standard now would be an equivalent mistake.

It really comes back to the same theme I've been making about fiscal policy. You can't just address half the issue (taxes but not spending, or a monetary gold standard without fiscal restraint). What the situation calls for is internal discipline, not some gimmick.

The Great Depression was not worsened by the dollar's link to gold. In fact, the stability of the unit of account probably made the disastrous consequences of Smoot-Hawley and the corresponding tax rate increases less severe.

Loose money is not good economics. Stable money is.

Let me clarify (I apologize for pajama-blogging too quickly). By "appreciation in the price of gold" I mean an increase in the relative price of gold, e.g., the price of gold in terms of potatoes. This relative price went up because of the late 1920's financial turmoil. The dollar price of gold was fixed by virtue of the gold standard. What this meant is that the dollar price of potatoes had to fall, i.e., deflation.

Larry, I'm glad you brought that up as we wrap this discussion up. I think the internet will spread freedom across the globe. The blogosphere is the free market of information, unleashing powerful ideas and innovations. You yourself have creatively fused the mainstream media with the internet. eBay is a borderless, free-trade country in its own right. China and India, once contained, are now part of the global community. Google is worth 6 times more than GM.

We won the genetic lottery, folks. We live in the best country in the world at the best time in history. The only problem with the present is that it's as close as we can ever get to the future.

It's a brave new world out there and I love every bit of it.

Is the Google internet economy here to stay? Good question, Larry. Remember just a few years ago when Microsoft ran the world? They're already forgotten! Yes, the internet can make us more productive. I think we have barely scratched the surface of the innovation created by the internet. It sure has the potential to make life more interesting, productive and satisfying. It would help to have a better elementary school system in the United States. Improving that sector with a little competition would go a lot further in improving real wages and the average US standard of living than all the fiscal and monetary stuff we've been talking about here today.

Jim-- on your gold view, that is essentially Ben Bernanke's thinking, is it not?

The Google economy is wonderful. The internet is supply-side in all its virtues. Let's hope we don't start taxing it. It would weaken the gains in productivity it is producing.

You know what's also great about the Google Economy? Is that people of the future will be looking at these Blog Jams and will compare us with cavemen. By then, the internet will be completely virtual. That scary. But fun, exciting, wonderful scary.

Many thanks to everyone for great blogging. Hope you'll come back again.

I can't imagine how I'd function personally and professionally without Google. If I'm here to stay, so better be Google.

Although I do think there's an arms race out there between Google and the spammers and Google-gamers. I'm in the trenches of this with my own blog, barely keeping one step ahead of the invading spamming hordes. Hopefully the good robots of Google will figure out ways to always stay ahead of the bad robots.

Thanks Larry. All the best to everyone...

Thanks all.

Thanks Larry...great idea.