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Larry Kudlow: A Supply-Side Economic Solution
Team Obama is in economic trouble on two fronts right now: The dollar could be headed toward its demise, while the jobs and unemployment numbers have gotten worse. (The unemployment rate is up to 9.8 percent as of the September report released last week.) And there’s a simple policy mix the White House could adopt to fix this. It could enact the Mundell-Laffer supply-side approach of a steady King Dollar for price stability and low marginal tax rates to spur jobs and economic growth.
Columbia professor and Nobel Prize winner Robert Mundell and Ronald Reagan adviser Arthur Laffer put this formula to work nearly 30 years ago, and it launched a massive low-inflation, bull-market prosperity. Of course, I am a supply-side fossil. I am a dinosaur and a relic of the past. But I still believe this approach could work again, even if it’s not going to happen.
The dollar has been falling on and off for nearly 10 years, and it’s in big trouble right now. The commodity inflation, housing bubble and oil shock of recent years all can be traced to dollar weakness and excess money-creation by the Fed. A weak dollar helped destroy the Bush boom and create the Great Recession. But now people are talking about ending the dollar’s reserve-currency status.
According to London’s Independent, the Arab oil producers in the Persian Gulf are planning with China, Russia, Japan and France to end dollar transactions for oil and move instead to a basket of currencies that might include the Japanese yen, the Chinese yuan and the euro, along with gold and some kind of regional Gulf-state currency.
I say, where there’s smoke there’s fire. The dollar-demise story just won’t go away, and it’s clear now that China and others have lost confidence in the greenback. For the United States, this is mostly a self-inflicted wound. And the Treasury and the Fed are in denial about it. The gold price has jumped all the way to $1,050, while the dollar index has fallen again. Without question, the United States is creating too many dollars through the Fed, and fiscal disarray continues to threaten more of the same.
And here’s a real conflict brewing in the financial markets: The Fed is fighting deflation with a near-zero interest-rate target, while gold, the dollar and commodity markets are signaling that inflation is the real problem. Somebody is going to be very right here, and somebody is going to be very wrong. I’m betting on the markets being right.
So I have a thought, at least for the short run: The Fed should follow Australia, the first G-20 country to raise its target interest rate. The Aussies lifted their rate a quarter-point to 3.25 percent. Right now, the U.S. Fed should lift its target rate by 25 basis points. The Fed funds target is currently 15 basis points, so this move would make it 40 basis points. It would be a dollar-protection signal; a price-stability signal. At the least, it would be a beginning. Next, the Treasury should buy some dollars in the open market to back up the Fed.
As the White House considers a second stimulus package, here’s another thought: Go for growth. Reduce tax rates to provide growth incentives (something Team Obama has avoided like the plague). Cut the top corporate tax rate from 35 percent to 25 percent, and accompany that with a small-business tax cut from 35 percent to 25 percent. And leave the Bush tax cuts alone. Don’t let them expire in 2011. That’s cap-gains, dividends and the top personal rate.
Yes, this is a supply-side solution: Reducing tax rates will ignite growth incentives.
And by applying it, Team Obama would be borrowing from George W. Bush, Bill Clinton, Reagan and John F. Kennedy (Calvin Coolidge and Andrew Mellon, too). Forget about Keynesian spending multipliers, which Harvard’s Robert Barro writes are less than one. Forget about class warfare. Forget about income redistribution. Go for growth.
Again, I know I’m a supply-side fossil and a relic of the past. But the Mundell-Laffer policy plan — which has worked historically for Republicans and Democrats — could truly save the nation and its economy at this critical juncture. Monetary restraint and the incentives of lower tax rates will solve the dollar and unemployment problems.
In our supposedly post-partisan era, why not give it a try, President Barack Obama?
— Larry Kudlow is the founder and CEO of Kudlow & Co. LLC, an economic research and consulting firm in New York City, and host of CNBC’s Kudlow & Company. Click here for more information, or click here to contact him.
Comments
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» on 10.08.09 @ 05:31 AM
Larry, I have news for you. Supply side economics has never worked. The old trickle down never happens and the middle/lower class do not see the benefit. The only result is a widening in the gap between the haves and the have nots.
The solution would be shift our government spending towards long term investments in America such as infrastruture, education, healthcare and the environment while cutting our military spending dramatically. We need to be much smarter with our use of military dollars and not allow defense contractors to waste billions. If we want to remain competitive with other nations and bring home manufactoring jobs then we need to make a much large domestic investment.
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» on 10.08.09 @ 01:40 PM
Agree with “local”.
Isn’t it amazing that as we still clean up the debris from the supply-side train-wreck
that almost bankrupted the economies of many Western democracies, Kudlow is
already lobbying to go back to the system that totally failed on his “pundit” watch?
His kith & kin on Wall Street are already lobbying to go back to the “unlimited bonus” system for the biggest risk-taking speculators.
His banker and broker friends are lobbying non-stop to block systemic and
structural reform of those parts of the economy that failed first, failed worst, and
took gigantic taxpayer bailout subsidies we may never get back.
Our free-market economy’s relationship to China and India, on the one hand, and
the worldwide supply and price of energy on the other, have virtually nothing to do
with Laffer’s work, or “supply side economics” as practiced during the Reagan-Bush
years.
Isn’t it also amazing that so many “free market conservatives,” like Kudlow, sat
silent, when GW Bush went 1000% OVER budget on funding two foreign wars and
beefing up Homeland Security, as he “funded” them off-budget, and simultaneously
offered “tax cuts” to America’s wealthiest individuals, corporations, and trusts?
All those sick chickens came home to roost last year, in gigantic deficits, a failing
economy ravaged by fraud, bogus appraisals, phony valuations, on top of two wars
with no clear EXIT plan.
Sure, Obama-Bernanke are in really tough fiscal spots. But who put them there? It
was people like Larry Kudlow, and the politicians he slavishly backed for 30 years.
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» on 10.08.09 @ 07:04 PM
Larry is right of course and the two lefty loonies above still need an education in economics. But what Larry does not mention and it is a big reason why LTR has this goofy notion supply side doesn’t work (really it’s not your fault LTR), is that the growth we saw in the 80’s and 90’s was largely speculative. While real estate, stock and other financial instruments were the rage during the last 4 administrations our net manufacturing as a product of our GDP dropped from 33% to 12%. That’s a whopping 60% decline! While partisan hacks point fingers at each other and debate the merits of their own economic favorites our ability to create wealth continues to bleed away. Moving money around does not make wealth. Oh sure it might make someone wealthy but it does not make wealth. Wealth creation happens when you extract raw materials and use them and add value to those materials through manufacturing. We made the Middle East, Japan, Korea, and now China very wealthy by letting them do the wealth creating while we all sat back fat dumb and happy consuming our selves into a giant $50 trillion debt. When those container ships down at Long Beach harbor are shipping more goods out than in, things will turn around for our country otherwise, no matter what system you want to bellyache about is in play we will continue to get poorer and poorer. China is a communist country exorcizing supply side capitalism. Why is it working? Because they make stuff. Why won’t your socialist system and Larry’s supply side system work here? Because we don’t make a damned thing anymore. Get a clue people.
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» on 10.29.09 @ 12:58 PM
Here are the facts. When you compare supply-side tax cuts in Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, Slovakia, and the United States vs. non-supply policies in Austria, Belgium, Denmark, France, Germany, Italy, Netherlands, Portugal, Sweden and the United Kingdom, those in the first group:
1. Grew Gross Domestic Product (GDP) and export trade more than twice as fast than in the higher-tax nations.
2. Investment growth was five times as fast in the first group.
3. More of the governments in the supply-side-oriented countries had modest budget surpluses, in comparison to the significant budget deficits in more of the higher-tax nations.
4. Interest payments on government debt (as a percentage of GDP) were dramatically lower in the countries following a more supply-side direction.
5. Real consumption rose more than three times as fast.
6. Employment increased almost twice as much.
7. Government spending on various social services actually grew at double the rate as in the higher tax economies (sigh… can’t be all good can it?)
You Consumer-Keynesian folks obviously are drinking the Obama Kool Aid.
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» on 10.29.09 @ 02:45 PM
Here are the facts. When you compare supply-side tax cuts in Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, Slovakia, and the United States vs. non-supply policies in Austria, Belgium, Denmark, France, Germany, Italy, Netherlands, Portugal, Sweden and the United Kingdom, those in the first group:
1. Grew Gross Domestic Product (GDP) and export trade more than twice as fast than in the higher-tax nations.
2. Investment growth was five times as fast in the first group.
3. More of the governments in the supply-side-oriented countries had modest budget surpluses, in comparison to the significant budget deficits in more of the higher-tax nations.
4. Interest payments on government debt (as a percentage of GDP) were dramatically lower in the countries following a more supply-side direction.
5. Real consumption rose more than three times as fast.
6. Employment increased almost twice as much.
7. Government spending on various social services actually grew at double the rate as in the higher tax economies (sigh… can’t be all good can it?)
You Consumer-Keynesian folks obviously are drinking the Obama Kool Aid.
You don't have permission to flag this entry.
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