Posted by Joseph Y. Calhoun, III

Just One Thing - Economist Survey

Dr. John Chapman

John Chapman was an economics instructor and research assistant at the University of Georgia before becoming an NRI fellow and joing the American Enterprise Institute. He is currently currently working on a book about the history and impact of private equity.

Dr. Chapman’s Response:

“The  significant linkage between laissez-faire policies and economic prosperity is an empirical regularity in economics as axiomatic as the scarcity of all non-free goods.  As such, the unprecedented levels of government intervention in the U.S. economy in 2008 will prove in time to be so disastrous as to have changed the trajectory of our lives. One small way to think about this is to impose the economic growth rate of western Europe since World War II on the United States – roughly half of our 3.4% long run average.  The compounding effect of this shows how poorer a society is in a generation’s time, but sadly, the political class now led by Mr. Obama offers more of the same Keynesian spending and monetary easing which assure slow growth and recession.

The Obama stimulus package and the Fed’s continued disregard for the dollar are, in short, a policy set which is the very antithesis of the formula for wealth and jobs creation witnessed around the world since the dawn of trade and commerce.  This is no trivial matter.  Global recovery will only be led and sustained by a return to growth in the United States. Such recovery is best effectuated via a proper diagnosis:  the disastrous monetary policy of the Federal Reserve, coupled with misguided federal housing finance policies, led to a credit-induced boom that was unsustainable.  The consequences of these government-originated errors have been misdirected resources and enormous waste of scarce capital, and are manifested in corporate profit contraction, job losses, and declines in real wealth.

Given this history, sustainable economic growth is best incited via a veritable recapitalization of the entire U.S. economy.  This requires four things: (1) deep cuts in the corporate tax rate, at 35% the second highest among all industrialized economies; (2) capital gains and marginal income tax rate reductions, inducing saving and job-creating investment; (3) a stronger and stable U.S. dollar, to promote long-horizon investment in U.S. assets, a steady price level, lower interest rates, and restored confidence; and (4) federal spending restraint, which engenders the success and sustainability of the prior three initiatives.

If one were permitted only one policy lever, I would choose a comprehensive reduction in tax rates on profits, capital gains, and marginal incomes, in that order of preference.  (As a longer term wish, the abolition of the Federal Reserve, and a return to a monetary system based on a commodity [viz., gold, free banking, and competitive note issue would guarantee long-run prosperity and an end to Fed-induced business cycles).

The four items mentioned above are core to a policy mix promoting strong economic growth, and are relatively more embraced by high-growth countries.  But Mr. Obama’s team have signaled a preference for transfer payments over growth-inducing tax cuts; unproductive and politically-motivated spending growth; a disdain for saving and recapitalization; and, a ratification of the Bernanke weak dollar which will result in a punishing inflation before Mr. Obama’s term ends.  This is as astonishing as it is sad, because it is as if the Obama team purposefully decided to emulate the economic failures that always accompany interventionism. If so, politics will again have trumped economics, resulting in long-term diminution of economic growth and welfare.  And in the near term, we are in for double-digit unemployment and zero growth.”