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Kudlow: Optimism Is in the Air

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You might not know it from the acrimonious political debate on cable and broadcast TV, or on talk radio, or on websites and blogs. But here's a counterintuitive observation: Amid all the negativism out there, I believe optimism is in the air.

That's right. Optimism.

Sometimes you have to search for it, or read it in the fine print. But I believe the political economy is getting better, not worse.

Let me make a few points to defend what most folks believe is an indefensible position.

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The stock market is hitting record highs daily, returning a tremendous amount of wealth to the half of American households that own shares. This investor-class wealth-creation alone is sparking a new sense of confidence and optimism.

Then on a smaller scale, housing—the other great source of American wealth—is beginning an impressive recovery. Over 60 percent of Americans own their own home, a key form of wealth. Like stocks, the housing recovery is creating a new sense of optimism after a very long and depressing dry spell.

Then there's the anemic economic recovery. It's the worst in modern times going back to 1947. But wait a minute—things are looking up here, too.

Let me quote from the highly respected economists Conrad DeQuadros and John Ryding: "In the last two weeks, we have seen manufacturing ISM, non-manufacturing ISM, ABP employment, payrolls, jobless claims, retail sales, and industrial production beat expectations and show an upswing in economic activity."

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Record profits for business may be driving this economic pickup. And it's all unfolding after the supposedly catastrophic budget-cutting sequester, and after a tax-hike bill that supply-siders like myself opposed (although income and investment taxes went up much less than feared).

In fact, even the eruption in government spending is showing signs of calming down. Taking into account a modest recovery, spending-cut bills of roughly $2 trillion, and an end to the failed spending stimulus of 2009, the federal spending share of the economy has dropped from 25 percent in 2009-10, to 24 percent in 2011, to just below 23 percent last year.

As I have argued time and again, spending cuts and limited government lower the overall tax burden and promote economic growth.

Finally, Federal Reserve policy remains highly accommodative, while there are no real signs of an inflation problem. The Fed has stabilized nominal gross domestic product (total spending in the economy) at around 4 percent, which will probably move higher toward 5 percent in the next year. And King Dollar is strengthening. All this is good.

And might there be just a bit more optimism on the political front?

President Barack Obama has embarked on a charm offensive, initiating more dialogue with Republicans than in the past four years. Of course, the Reagan adage "trust but verify" applies to Obama's newfound charms.

But in a recent interview with former vice-presidential candidate and current House budget chair Paul Ryan, R-Wis., I found more optimism. While on the subject of Obama's new diplomacy, I asked Ryan if he believes a grand design, including spending, entitlements, and tax reform, is a good thing. Is it achievable? He replied, "I do think it's a good thing. I do think it's achievable. And I do think it should be done.

"So the question from our perspective is, 'Was this so-called charm offensive a one-off event?' Or was it a new posture—a new conversion that's about to continue?"

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Ryan's new budget roadmap is more vision than green-eyeshade exercise: repeal Obamacare. Replace it with a patient-centered health-care system. Go for true pro-growth tax reform by lowering marginal rates and broadening the base for individuals and businesses. (By the way, Obama is talking about corporate tax reform. Maybe common ground can be found.)

Ryan also spoke of welfare reform, including food stamps and ways to reduce child poverty and get single mothers back on their feet. He wants to do everything possible to encourage the energy revolution sweeping America. He believes a lower spending burden on the economy is pro-growth. He targets a ten-year balanced budget at 19.1 percent of GDP: Budget growth overall would drop from 5 percent to 3.4 percent, while spending would be curbed by roughly $5 trillion.

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And yes, after his first significant meeting with President Obama, and despite the major differences, Paul Ryan says it's possible to achieve common ground.

"I'm cautiously optimistic about this," he said.

Of course the differences are huge. And Senator Patty Murray, D-Wash., just put out a Democratic budget (first time in over four years) that raises taxes by $1.5 trillion, with virtually no spending cuts. No common ground there.

But I'm still optimistic. Small pro-growth advances are possible as long as people are talking. I see a thaw in politics. So does the stock market.

Optimism is in the air.

—By CNBC's Larry Kudlow; Follow him on Twitter @larry_kudlow

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