ANALYSIS / OPINION:
It is depressing to see how government politicians repeat the same mistakes over and over again, for example in Afghanistan. The great economist Robert Mundell, known as the father of supply economics and the euro, died of his absence last April at the age of 88 years of age. The lesson was that inflation, budget deficits, high debt, and a large state are detrimental to the public good and that the cost of correcting them is so great that no democratic government would want to repeat the experience. ”
We just celebrated the 40th anniversary of the Reagan tax cuts on labor and capital that were part of Bob Mundell’s recipe for economic renewal – including reversing the excessive monetary growth that brought about the great inflation of the 1970s. President Carter appointed Paul Volcker chairman of the Fed in 1979 after his predecessors Arthur F. Burns and G. William Miller failed to contain inflation.
President Reagan, who took office in January 1981, agreed with Mr. Mundell, Art Laffer, Marty Anderson, and his other economic advisors that Mr. Volcker’s austerity measures – which sparked a painful but necessary recession – were essential to inflation Lower the economy and re-stimulate growth. The tax cuts didn’t kick in until early 1983, but when they did the economy skyrocketed, generating record growth and job creation as inflation fell.
The experiment was so successful that it was copied by most large and many smaller countries, spawning a new golden age of global prosperity. Bob Mundell, wise as he was, did not foresee that the lessons of the success two decades after his Nobel Lecture would be discarded.
The abbreviation for the cause of inflation is “too much money to chase too few goods”. Not difficult to understand – so of course the amount of money has to be reduced and / or the supply of goods and services increased. During the pandemic shutdown last year, the government ordered a massive reduction in the production of goods and services. At the same time, the Fed was producing new money to enable the government to increase its spending so that most Americans’ nominal incomes do not fall. The current surge in inflation is not a mystery to most – but most are not Fed chairman Jay Powell or Treasury Secretary Janet Yellen, who claim to have been surprised by the surge in inflation.
One of the things I’ve noticed is how many smart people get stupid when they join government. Arthur Burns, for example, was a respected economics professor at Columbia University, where I was a PhD student. He taught macroeconomics, including the effects of money supply on inflation. When he became chairman of the Fed during the Nixon administration, he seemed to have forgotten what he had taught generations of students. Or did the reduction in monetary growth require interest rate hikes and tightening of lending, which President Nixon did not want? President Reagan then named Burns ambassador to West Germany, where he did a good job and apparently regained his intelligence.
Secretary Yellen supports President Biden’s proposal for much higher corporate and income tax rates, including the capital gains tax rate. She seems unaware of the harm such tax increases do and the history of tax rate increases and decreases since the personal income tax was passed in 1913 found overwhelming empirical and theoretical evidence that the capital gains tax rate is already higher than that Sales and growth maximization rate. So I bet that if the capital gains tax rate increases, real (inflation-adjusted) income will decrease.
Does Secretary of State Yellen have no clue about the relevant economic history or did she go dumb during her tenure in order to keep President Biden and the other idle political activists in the White House happy? Tens of millions of Americans will suffer from the excessive spending and taxes that Mr. Mundell and many others have warned about. If you know that a policy harms your fellow citizens but supports them, what does it say about your character?
Last week, officials from the Biden government tried to pressure Saudi Arabia and some of the other major oil-producing countries to increase production in order to bring prices down. At the same time, others in the government were enacting regulations that would reduce U.S. oil and gas production (which is less polluting than most foreign production). Were these actions the result of ignorance, stupidity, or a lively, mean dislike of US producers?
• Richard W. Rahn is Chairman of the Institute for Global Economic Growth and MCon LLC.