The greatest central banker in my professional lifetime was Paul Volcker. His signal achievement was bringing down the inflation rate from roughly 15% to about 3% more than three decades ago. The simplest way to look at the economic evils of runaway prices is to think of inflation as a tax hike — on consumers, savers, investors, corporate profits, capital gains, and so on. One humongous tax hike. And it was the myriad tax-hike effects of high inflation that wrecked the American economy in the 1970s. But Volcker turned that around, and he did so using a rules-based approach to slaying price hikes. He was an old-fashioned central banker who still believed the dollar should be as good as gold. And he carefully watched market-based signals like gold, commodities and the exchange value of the dollar to let him know if he was going down the right road. Ronald Reagan gave Volcker the ground to stand on, Volcker implemented his rules-based policy and a bleak inflation outlook was vanquished. In fact, it was Reagans supply-side tax cuts in combination with Volckers hard-money policies that launched a 25-year economic boom. Nearly 50 million new jobs were created while economic growth averaged about 3.5% a year. That boom also financed a U.S. victory over Soviet communism and restored American leadership worldwide. I reflect on all this as Janet Yellen gets ready to take over at the Federal Reserve. The economic issues are very different today than they were in the 70s and early 80s. Inflation is not the problem. But high unemployment and slow growth are. The U.S. economy is being held back. The real problem with this economy is not a lack of liquidity. Its a lack of incentives to grow, invest, take risks and start new businesses. Tax rates are going up again. Corporate tax reform seems dead in the water. Regulatory threats under the Obama administration proliferate. And the whole jerry-built ObamaCare plan is chock full of tax and regulatory obstacles to economic growth, not to mention how it damages the health-care system. Repeal ObamaCare and embark on pro-growth tax and regulatory reform, and the economy will grow much faster without repeated injections of Fed liquidity. There is only so much the central bank can do. And in terms of QE, it may already be that it can do no more. So what can Janet Yellen do? Bring a disciplined, rules-based approach to Fed policy. That would be a welcome development indeed. news.investors/ibd-editorials/112213-680350-inflation-is-a-tax-hike.htm?p=full
Posted on: Sat, 23 Nov 2013 14:33:03 +0000
Trending Topics
Recently Viewed Topics
© 2015