An alternative to popular faith

On May 26, 2010, the Wall Street Journal published an article by David Malpass*, which began : ”When Ronald Reagan became president, the world had too much inflation, i.e. too much money chasing too few goods. Economists argued for higher taxes to sop up extra demand. Instead Reagan chose to cut tax rates to encourage more output and pursued an strong dollar policy. The result was more goods and better balance between the supply and demand for the dollar. The malaise ended 18 months into his administration, with inflation declining gradually for nearly 20 years. We now face a different, equally severe problem – too much government spending and debt.”

See anything wrong with this? Forget, for a moment, the inaccurate definition of inflation (“Too much . . . too little . . .” See: INFLATION ) and think about the overall substance of the paragraph. He begins at the right place (Cutting tax rates) and ends at the right place (encourages more output), but wanders aimlessly and illogically in between.

First, there is no way cutting tax rates can end inflation, simply because cutting tax rates increases the supply of money, and increasing the money supply never has been considered disinflationary by any economist. However, because cutting tax rates increased the money supply, this did encourage output. So, all right, Malpass may have been a bit confused, but at least he arrived at the right conclusion. More money = more production.

But then, in the article, he wanders off again, claiming: “[...] too much government spending and debt.” Huh? After WWII, the Reagan administration began the greatest debt growth in U.S. history, and it was this debt growth that created the mighty engine of economic growth in the 1980’s.

Malpass spends the rest of his article decrying the federal deficit and debt he helped create (“nosebleed levels,” “debt the size of the Grand Canyon”), and even throws in a couple of non sequiturs about bill length (“health care reform . . . a whopping 2,700 pages,” “financial reform . . . 2,000 pages”), while as usual with debt hawks, not providing any evidence whatsoever that federal debt and deficits have an adverse effect on our economy.

He claims the debt and deficit are “starving small business of capital” without telling how an increase in federal money creation could starve anyone of money, and he finishes with this telling statement: “[...] true leadership requires . . . reducing government spending substantially enough to convince the private sector to invest again.”

So, he wishes us to believe that if the government pays less money to soldiers, military equipment manufacturers, doctors, nurses, hospitals, road and bridge and dam builders, farmers, poor people, teachers, home builders, railroad personnel, security-related firms and to all the other businesses selling to the government, the private sector somehow will have more money for investment.

And once again, this is the way our leaders have managed to guide us into an average of one recession every five years.
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*David Malpass was deputy assistant treasury secretary in the Reagan administration, and is president of Encima global LLC, and a Republican candidate for U.S. Senate in New York.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity