David Frum's Weird Attack on Larry Kudlow

Was the Bush boom the "greatest story never told"?

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This following quote will surely make David "Axis of Evil" Frum shake his head in disbelief. "When it comes to the conservative base and economics," a White House political adviser told me recently, "the only two things that matter are the [Wall Street] Journal's editorial page and Larry Kudlow."

Frum, a conservative pundit and former Bush speechwriter, has leveled some pretty biting criticism at Kudlow (and like-thinking economic conservatives), without mentioning him by name. In a recent piece of commentary that basically adopts Barack Obama's stagnant-wages-and-rising-income-inequality critique of Bushonomics, Frum writes the following: "Even before the Wall Street crisis, the American economy had underperformed from the point of view of the average worker. While national output rose strongly, most of the gains went to the top five percent of households. Most Republicans have been unprepared to even acknowledge these facts, much less explain them. They insisted that the Bush economy was 'the greatest story never told.'"

"The greatest story never told." It's a fun catchphrase that I've heard Kudlow repeat on his CNBC show time and time again during 2006 and 2007. (Full disclosure: I am a frequent guest on Kudlow & Co. and a CNBC contributor.) Indeed, if you do a Google search on "greatest story never told" and "Bush economy," the first thing that comes up is an article written by Kudlow for National Review Online. If you attack that idea, it's clearly an attack on the expertise of America's leading conservative economic commentator.

It's also an attack on supply-side economics and the tax cuts of 2001 and 2003. In a blog post commenting on Frum's criticism, liberal economist Brad DeLong gleefully wrote that "David Frum has important news, cutting marginal tax rates on the rich...is NOT—repeat NOT—the way to get strong, balanced, equitable economic growth in America."

But Frum's "facts" are wrong. Moreover, I think he has misjudged terribly the actual performance of the U.S. economy during the past eight years and should probably buy Kudlow dinner in Manhattan as penance. Frum's economic errors are many, but probably fairly common among readers of the New York Times. I will attempt to briefly dispel at least some of them.

1) Workers' incomes have been stagnant for years. Wrong! According to economist Ed Yardeni, average real pretax earned income per worker rose to a record high of $48,957 in April and is up 11 percent since January 2001, when President Bush took office. Now I'm not sure what those numbers have done lately with the slowing economy and credit crunch (more on that later), but the economic pessimists have been complaining for years about workers continually falling ever further behind. And remember, this measure does not include benefits. Plus, many estimates of real income or real wages skew lower because of the inaccurate way the government measures inflation, overstating it by two thirds of a percentage point (says economist Michael Boskin) to almost a full point (says the Labor Department) every year.

2) Income inequality has exploded. Wrong! More and more research is revealing that the supposed rise in income inequality is a bit of a crock. One reason is the "China Effect." A recent University of Chicago study found official income inequality statistics fail to take into account that lower-income Americans tend to consume more inexpensive Asian goods. As the study's authors conclude, "This price effect offsets almost all the rise in inequality measured by official statistics." And whatever slight rise in inequality that's left over can easily be explained by technology and the expanded global market for CEO talent.

3) The fundamentals of the economy are weak. Wrong! There is way more to the U.S. economy than Wall Street. Did you know that the World Economic Forum, the Davos folks, for the second straight year judged the United States as possessing the most competitive economy in the world? (Then came Switzerland, Denmark, Sweden, and Singapore.) Among America's strengths: innovation, flexible labor markets, and higher education. And remember, the core U.S. economy is in far better shape than it was in the 1970s. Productivity, the key measure of an economy's strength, consistently grew at less than 2 percent in the 1970s and stayed weak until the tax cuts, deregulation, inflation fighting, and corporate restructuring of the 1980s blossomed into the tech and productivity boom in the 1990s and beyond. Productivity has averaged about 2 percent since 1995 and is now running closer to 3 percent year over year, including 4.3 percent in the second quarter.

The above numbers are just a few of the reasons why I believe Kudlow had it dead right and Frum is dead wrong. The pre-credit crisis economy was the "greatest story never told" and its inner strength is still being ignored today. (And I think smarter tax and entitlement policy could have made the past decade even stronger and more resilient. Also, don't get me started on government spending or the dollar.) Look, I realize that the economy is likely headed toward recession, if it isn't in one already. But the housing-credit bubble was years and decades in the making, which I am sure Frum must realize. (It's almost like some stuck-on-stupid feds planted a pair of economic IEDs called Fannie Mae and Freddie Mac to blow up the Amazing American Growth Machine on its road to Prosperity.)

Then there's this: If the economy was so good for workers, why have they seemed so glum the past few years? I dunno, exactly. Maybe they were still recovering from the late 1990s boom and subsequent stock market drop. Psychologists say people feel financial losses more deeply than gains. And all that was compounded by the 9/11 terrorist attacks and the Iraq war. Then gas prices started rising, a surefire consumer confidence killer. But it's tough to formulate good economic policy for the future if we can't even understand the economy of the near past and the "greatest story never told."