Tuesday, February 07, 2006

Timeless words

When making sure of the precise phrasing of Reagan's "government is the problem," I came across one of his quotes I'd never heard before:
Why is it inflationary if the people keep their own money and spend it the way they want to and it's not inflationary if the government takes it and spends it the way it wants to?
The speech, which he gave at the White House on June 11, 1981, is marvelous. True to form, Reagan emphasized tax cuts and entrepreneurship.

Every time we get good reports on GDP and employment, Keynesian economists come out of the woodwork to warn about inflation. Had they paid any attention to Mises, like Reagan had, they'd realize how prices work. Greater income, though it leads to an increased demand for goods and services, does not require an increase in prices (which is not true inflation) beyond the very short-term. Higher prices encourage greater supply, which in fact creates more jobs (and thus more production, more wealth) as people enter the work force to compete. Wealth builds wealth.

The paragraph containing the quote, and the preceding paragraph, are worth emphasizing:
Now, there are those who are insisting that we settle for less. They demand proof in advance that what we've proposed will work, and they refuse to accept the record of history which clearly demonstrates that tax rate reductions do work. I think we can prove that what they've been doing in the last few decades hasn't worked and never will. And I don't think it automatically follows that those who brought about the present economic mess are, simply by virtue of having done that, the best qualified to clean it up.

They never answer one question that I keep asking -- and you've probably heard me ask it. Why is it inflationary if the people keep their own money and spend it the way they want to and it's not inflationary if the government takes it and spends it the way it wants to? So, we're asked to believe that their proposal is more compassionate to the working people. But their proposal won't even match the built-in tax increase that they themselves are responsible for.
Isn't it incredible how, nearly 25 years after a speech we'd do well to remember, many economists still claim supply-side economics doesn't work? Don Luskin tore apart Robert Rubin's recent op-ed in the Wall Street Journal, giving us a history of what really happened with Clinton's 1993 tax increases and the 1997 tax cuts:
As you can see, from 1993 (the first year of the Clinton tax hike) to 1996 the increase in revenue is somewhere between negative and negligable -- the increased revenues Clinton hoped for from his tax hike simply did not materialize. The positive surprise versus expectations started in 1997 and the years after. What happened in 1997? A Republican congress cut the capital gains tax. So it all went just perfectly according to supply-side theory.
I'd like to add that the jobs increase was in large part from the global technology boom (an unsustainable one, as it turned out), and a bit also from NAFTA. Clinton was right to sign it, but then again, any President could have. There were no special Clinton policies that were responsible for the 1990s, certainly none of Krugmanomics' rationalization about higher taxes, budget surpluses and accomodating monetary policy.

Rubin is a "deficit hawk" of the most dangerous kind: he thinks nothing of tax hikes to cover budget deficits, regardless of the discouragement to economic growth that they produce. I once said that raising taxes is not the solution Keynesians think it is, because they ignore the "I" word in economics. Keynes had it wrong: it's not "inflation." It's "incentive."

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