The Public Policy / Recession Prevention

...Let's look at the facts: •Each time Congress has increased taxes since World War II, spending has increased an average $1.58 for every $1.00 increase in taxes...

...A recession is two successive quarters of negative economic growth, which is an economist's way of saying: you're in a recession when for six solid months the GNP has gone not up but down...

...and so the first thing to do: the Federal Reserve Board should step moderately on the money accelerator...

...We should look at history: what worked in the past and what didn't, which economic doctors' prescriptions and prognoses worked and which didn't...

...Opponents of the rate reduction seem to have a greater need to punish success than to create opportunity, new jobs, and economic growth...

...I think we can...

...There is one other thing that the Administration needs to do this year...

...Chamber of Commerce...

...The single most serious mistake was made in February 1987 when the United States became party to the "Louvre Agreement," an attempt to stabilize exchange rates among the major industrial countries...

...I believe we are...

...They have largely ignored or downplayed the role of money creation both on real economic activity and inflation...

...The neo-classical economists, for the most part, understand that high marginal tax rates are clearly destructive to economic growth and ultimately government revenues...

...And the wonderful thing about Congressman Obey's striking statement is that it captures in a mere six words a mindset that is quickly leading us toward disaster...

...The Fed does face a dilemma—too much money growth will result in inflation, too little in recession...

...Thus deficits have tended to get bigger rather than smaller after each tax increase...

...We are now witnessing the marvelous spectacle of socialist governments selling off government-owned businesses to the private sector and reducing marginal tax rates...

...they are the result of mistakes in policy...

...In addition, the responsible members of Congress also seem determined not to report out a dangerously protectionist bill...

...The last time that happened was in 1982...

...Are we close to a recession...

...Unfortunately, our next recession, whenever it occurs, may be worse...

...The prescriptions that will work toward preventing a recession are: (1) the Federal Reserve must increase the rate of money growth...

...But it is news that the government—long criticized as hopelessly ineffectual—has led us with such sureness and consistency to the brink of a major recession...

...Can we save the world from the cat (if there is a cat...

...In fact, the resolution has become a daily scandal as the newspapers discover what's in it...

...Unfortunately, economic reality has caught up with the Keynesians...

...In a 1987 study, for instance, Professors Barth and Bradley at George Washington University found that increases in government transfer payments had a depressing effect on economic growth —not surprisingly, since increases in taxes to support such payments decrease taxpayer incentives to engage in productive economic behavior, and the recipients of Social Security and welfare are penalized by reductions in payment if they work or make extra income...

...The Keynesians had argued that increased government spending was an effective answer to unemployment...

...Recent studies of the U.S...

...Truly bizarre arguments have been made as to why Congress cannot cut spending and why we must have a tax increase...

...Now to the second point: tax increases must be avoided and the capital gains tax rate must be reduced...

...Because the Germans and the Japanese continued to maintain restrictive economic policies from an unfounded fear of renewed inflation, our Federal Reserve was obligated in turn to restrict money growth and maintain higher interest rates than were fundamentally justified...

...They understand that the level of government spending is the true measure of the crowding out of the private sector, and thus that a high rate of government spending clearly reduces the rate of economic growth...

...It is not exactly news, of course, that politicians waste the taxpayers' money, thereby slowing economic growth and the creation of jobs...

...In 1978 capital gains tax rates were cut from a maximum of 49 percent to 28 percent, and revenues went up—not down...

...Certain doomsday scenarios have the whole worldwide financial system unwinding crazily, like a ball of wool thrown about the room by a big old cat...

...There are no guarantees this behavior will not be repeated: the incentives for members of Congress are all on the spending side...

...But pressure—how about from the presidential candidates of his own party?—would certainly help...

...W e are now in a period of economic turbulence because of policy mistakes of the past eighteen months...

...The trick to keeping the economic expansion going is to realize that no tricks are needed...

...Can we save our economy and avoid a recession...

...This results in fewer job opportunities and less progress against poverty: in sum, more economic misery...

...With little to lose, and a chance to salvage his anti-spending reputation at least in part during his last year, the President may well choose to play the role of leader...

...In this century the prescriptions of the Marxist economists have obviously been disastrous...

...Today the chance of a recession is clearly greater than the chance of renewed inflation...

...Most economists in the United States now tend to be either some form of Keynesian or some form of neo-classical (including supply-ciders and most monetarists...

...Make it clear: no protectionism—not any, not now, not ever...

...With inflation running at about 4.5 percent, this represents a negative real rate of by Richard W Rahn money growth, insufficient to accommodate the current pace of economic expansion...

...Reducing the maximum capital gains tax at least to its pre-1987 rate of 20 percent, and ideally to 15 percent, would increase tax revenue to government and give a needed boost to our stock, venture capital, and real estate markets...

...0 THE AMERICAN SPECTATOR MARCH 1988 27...

...To date, the Administration has let House Speaker Jim Wright and his allies win the spending public relations war...

...The prescriptions are simple but not painless...

...Yes, the federal government might be "shut down" a couple of times before the battle was won...

...David R. Obey (D-Wis) of the House Appropriations Committee, justifying his support of a provision to build private schools in France, in the appropriation bill Congress passed at the end of the 1987 session...

...Throughout all of 1987 the Federal Reserve Board pursued a policy of extremely slow money growth...

...Beginning in January 1987 the Fed slammed on the monetary brakes, causing the narrowly defined money supply (Ml) growth to plummet...

...The fact is, increases in government spending as a percentage of Gross National Product work to reduce the growth rate of the economy rather than enhance it...

...If at every speaking opportunity the President and Administration colleagues hammered home the facts—that Congress has spent $114 billion more than the President requested during the six full and completed fiscal years under the Reagan Administration, that Congress has not even once complied with the terms of its own budget acts during the Reagan years, and that Congress did not send a single appropriationsbill to the President for signing before the beginning of the current fiscal year—the President could win a veto strategy...

...No to any trade bill that even sniffs of protectionism—because a trade war would guarantee a worldwide depression...

...spending bills, including continuing resolutions, that exceed the GrammRudman-Hollings targets, even by one dollar...

...Well, at last they are outraged at the restrictions Congress has placed on even studying privatization, and at its refusal to cut even items it had promised to cut in the agreement that resulted in December's continuing resolution...

...The Keynesians and their allies, almost to a man, argued that President Reagan's tax cut would be wildly inflationary and lead us into a long period of economic stagnation...

...In 1981 rates were cut again, from 28 percent to 20 percent...

...We need only go back to the late 1970s and early eighties and look at the predictions of both of these schools to get a good idea as to who we should believe today...

...26 THE AMERICAN SPECTATOR MARCH 1988 N umber three: the President should veto every spending bill, including debt ceiling increases and continuing resolutions, that do not literally meet the Gramm-Rudman spending growth reduction targets...

...3) the President must announce that he will veto any Richard W Rahn is vice president and chief economist of the US...

...Nevertheless one can take a look at the policy prescriptions of various schools of economics, see where they have been tried, and examine the results...

...Growth slows because government spending programs tend to be less efficient than those in the private sector, because tax administration and compliance become more expensive, and particularly because many government transfer payment programs tend to misallocate resources and, again, provide disincentives for productive economic activity on the part of both recipients and taxpayers...

...In addition, Congress refused to reduce the growth of wasteful spending and passed some foolish tax provisions, i.e., higher capital gains tax rates and restrictions on deductible expenses for mergers and acquisitions...

...And since somebody was always unemployed, the politicians, who enjoyed spending other peoples' money anyway, followed the Keynesian prescription...

...Fortunately, the entire Administration, from the President all the way down the ranks, clearly seems to understand the damage a protectionist trade bill would cause...

...Why would the President and the White House staff suddenly embolden themselves after years of timid behavior...

...The recession of that year caused a considerable amount of pain: the unemployment rate, for instance, soared to 9.5 percent (today it stands at 5.8 percent...

...2) the Administration and the Congress must not only avoid any tax increase but reduce the capital gains tax rate...

...Of course, inflation dropped sharply and almost vanished by 1986, and we entered the longest and strongest peace-time period of economic and employment expansion in our nation's history...

...The Fed needs to stop trying to stabilize exchange rates, and instead get money growth back to the target ranges it had set early last year...

...Nevertheless, history clearly shows that when a major drop in the stock market occurs in conjunction with a drop in money growth rates recession follows—except when the Fed has immediately stepped in to increase money growth...

...D ecessions are not the result of ran- i\ dom occurrences...

...The democratic socialist economies have performed somewhat better than the Marxist economies, but have still been no match for free-market, low-tax, strong property-rights economies...

...By increasing the cost of whatever is being taxed, tax increases lower production and thus reduce incomes...

...Congress's on-going "bad faith" is a thumb in the eye of an occasionally energized White House...

...and other developed nations make clear that government spending is a depressant not a stimulant to economic growth...

...But that is only to the good...

...capital gains tax revenues again went up...

...Total M1 was less than one percent higher at the end of December 1987 than it had been in April...

...Increases in tax rates on labor, capital, or directly on goods or services tend to bring in less revenue than forecast because any tax increase raises the cost of whatever is being taxed, thereby resulting in a diminished demand for the taxed item...

...The other measures of money growth were also well below target, even after the October market crash...

...and (4) the President must veto any protectionist trade legislation...

...Nothing shows the mean-spiritedness of the American left more than its opposition to lower capital gains tax rates...

...The disease, however, would be far worse...

...The Keynesians tend to minimize the disincentive effects of taxation and governmental regulation and to see government spending—at least on their favorite programs—as uniformly beneficial...

...And they understand that inflation is largely a monetary phenomenon money growing faster than the supply of goods and services is inflationary—and that changes in the growth rate of money have at least a short-run effect on real economic activity...

...More importantly, Barth and Bradley also found that government purchases of goods and services were a net drain on economic growth because of the tax and debt "extraction cost" from the private sector to support them...

...F or the non-economist, the problem of knowing which economist to believe is a difficult one since the profession has no defined standards of competence...

...The historical evidence, plus a host of economic studies, clearly demonstrate that the revenue-maximizing rate of the capital gains tax is 20 percent...

...To reverse this disastrous trend, the President—maybe this one?—could decide that it was time to become tough, resolute, and responsible by actually using his veto powers...