Throughout much of the world, the adoption of classical economic policies is contributing to an economic boom. The successful application of low-tax, free-market policies is producing the greatest economic transformation in history. As global growth soars ahead at rates of 5% or more, hundreds of millions of people emerge from conditions of abject poverty.

In the US, the 2003 tax cuts have enabled the economy to perform extremely well in the face of numerous obstacles. The wealth-creating impact of low tax rates is likely to continue through 2010. In addition, monetary policy is in the process of shifting from restraint to stimulus. While the delayed impact of monetary restraint could produce some weakness early this year, the pace of business activity is likely to improve significantly as the year unfolds. For the next three years US economic policies should produce strong growth with relatively low inflation.

While the world is moving inexorably in the direction of classical principles, in the US there are mounting pressures to move policies in the opposite direction. The movement toward reducing trade barriers has stalled; a crackdown on illegal immigrants threatens the free flow of workers; and Congress ended the year with legislation that attempts to solve energy problems through edicts rather than relying on market forces. Allocating resources through political edicts is a throwback to the economics of socialism. After obvious failures, socialism has been discarded throughout most of the world. It’s ironic and disturbing to see it creeping back into US policy.

Neither political party has distinguished itself in terms of pursuing classical principles. Democrats vow to raise tax rates while Republicans vow to limit immigration. Each policy threatens future growth. In terms of the Presidential aspirants, none of the Democrats and only a few of the Republicans appear to understand the importance of classical principles in promoting economic growth.

While US economic trends should remain generally positive for the next 2-3 years, the outlook beyond appears less sanguine. Two major developments threaten to slow growth and increase inflation in the decade ahead. The first is the threat of higher tax rates. Current tax rates expire in three years and only a change in existing legislation can avoid damaging tax hikes.

Second, demographics point to little growth in the US workforce age population. This occurs at the same time that baby boomers retire in droves. Since Social Security and Medicare payments for retirees come from payroll taxes, the shortfall will produce pressure for some combination of major cuts in retirement benefits and increases in payroll taxes.

There are viable policies that can dramatically improve longer-term US economic prospects—policies that would make it unnecessary to raise tax rates or cut benefits; policies that would enable the US to maintain its position as the world’s leading economy. The key question surrounding the longer-term outlook is the extent to which the US will adopt such policies in time to prevent a period of slow growth and economic stagnation. Read Dr. G's Long-Term Perspective