How to make the Economy Grow

One thing about economics – like time and the weather, it plays no favorites.

  • Monday, November 3, 2008 7:05pm
  • Opinion

One thing about economics – like time and the weather, it plays no favorites.

The laws of economics are rigid. Abide by them and you’ll do fine. Violate them and you will suffer, whether you earn $20,000 a year or $20 million.

The country’s financial sector has been rocked, and the country has now entered a recession. How do you get out of a serious recession? Let’s first remember how we got out of the last one.

America endured three recessions from the late 60’s to the early 80’s. The last one featured sky high gas prices (though not as high as we were paying last Summer), high inflation (13.5%) high interest rates (approaching 20%) and high unemployment (which exceeded 10% in 1982). But by the mid-80s, inflation was dropping like a rock. So were interest rates. So was unemployment. Even the price of gas was falling. The President who had a 10.2% unemployment rate halfway through his first term ran for re-election and won 49 states.

How did this happen? Two changes brought recovery. First, a different monetary policy. Paul Volker was appointed to run the Federal Reserve Bank by President Carter in late 1979. His challenge was inflation, which had hit double digits. Volker squeezed the money supply to wring inflation out of the economy, but the short term effects caused big spikes in unemployment and interest rates. The new President, Ronald Reagan, not only refrained from putting political pressure on Volker to ease up, he reappointed him, and inflation plummeted from 12.5% in 1980 to 3.8% in 1982. The new monetary policy worked.

Today, the Fed, under Ben Bernanke, is increasing the money supply to meet huge demands for cash. This makes sense because the economy’s problem isn’t inflation, but the opposite: deflation – plummeting stock prices, property values, items like cars and TVs – and the Fed policy is adjusting the money supply accordingly. So we’re on our way to recovery already.

The second major issue is tax policy. The iron law of economics is that when you tax something you get less of it. When you subsidize something, or reduce the tax burden, you get more of it.

Barack Obama believes America would be better off with higher taxes on dividends, capital gains and incomes above $250,000. But now is the time to encourage more business activity, which means cutting business taxes. As for higher taxes on higher incomes, a majority of individuals filing tax returns above $250,000 are really small business owners who are listing their business income as personal income.

A tax increase on “the rich” actually hits small businesses the hardest. Why would we want to do that when we need small businesses to create more jobs?

If a Republican raised taxes rather than a Democrat…..the results would be the same.

Ditto for cutting taxes. Ronald Reagan cut business taxes. We got growth. Bill Clinton cut the capital gains tax. We got growth (both men were also big believers in free trade, which also spurred growth).

If we blend a pro-growth tax policy with a pro-growth monetary policy, we will work our way out of this recession, perhaps by Spring. But raising taxes will stall, and potentially reverse our recovery. The election’s over. It’s not about Republicans and Democrats any more. It’s about economics, pure and simple.

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