Ron Paul Trumps Cain and Perry on the Economy
Herman Cain and Rick Perry are betting on tax policy to resurrect the American economy. Cain has been pushing a 9-9-9 tax plan, while Rick Perry has been touting his plan for a flat income tax. Democrats are still focusing on stimulus as a way to jump-start economic activity. Both groups are wrong. Sound money is the path to economic prosperity.
A decade of deficit spending should have taught us by now that government spending does not stimulate sustainable economic activity. While lowering taxes has shown to be more effective than government spending, having a strong dollar policy would be more important yet. On this issue, Ron Paul has been the most vocal and visionary.
To examine why sound money is so important, it is instructive to examine the Reagan record. While Reagan's tax cuts are still widely remembered and talked about, less discussed is his fight with inflation. In 1980, the year before Reagan came into office, inflation was 13.5%. By 1983, inflation was cut to 3.2%, remaining below 5% for the rest of Reagan's time in office. The price of gold -- a key indicator of inflation and inflation fears -- decreased as investors abandoned commodities in order to cash in on the Reagan boom.
In the short term, the decision to tackle inflation was painful. Raising interest rates and cutting non-defense spending were both blamed for pushing the United States into a recession. Such criticism obscured the fact that the strengthening dollar was putting America in a position to blossom the next two decades. The stock market went from roughly 800 in 1980 to 11,000 in 2000. Millions of jobs were created. Unemployment sunk to 3.4% in April of 2000.
When the tech bubble burst, though, we reversed course. Economists like Paul Krugman called for the United States to create a housing bubble. President Bush, Alan Greenspan and Ben Bernanke heeded these calls, along with calls to devalue the dollar in order to rebalance the global economy. Deficit spending and artificially low interest rates produced a debt and consumption fueled bubble, which finally popped in 2008. Gold has soared, as has unemployment while job growth remains anemic. The Dow Jones is still oscillating around 11,000, just as it was a decade ago.
This is in spite of the Bush tax cuts. This bolsters the empirical case that sound money rather than low taxes is the most important factor in promoting economic growth. If Herman Cain and Rick Perry really want to rejuvenate the economy, they need to put aside tax policy and focus on monetary policy. Our zero-interest-rate policy has failed to spur growth and undermined faith in the dollar. Halting quantitative easing and balancing the budget by slashing spending will let bond markets know that America is serious about handling its debt rather than spending like mad until the inevitable default. This is an important step in getting the economy on track right now, because the current national debt is roughly $14 trillion -- equivalent to our GDP.
If the stock market begins to recover here or elsewhere and investors leave treasury bonds for greener, more profitable pastures, then the interest rates on treasury bonds will soar even if the Fed's discount rate remains at zero. 5% annual interest - not a lot by historical standards - would equate to $700 billion dollars in interest payments every year. Consider that federal tax revenues for the past two years have been roughly $2.1 trillion. Government health care costs for this year are expected to be $900 billion. That leaves precious little space for military spending ($925 billion) and other big ticket items.
It is no secret that our national debt threatens sustained economic recovery, but only one candidate has proposed a trillion dollars in spending cuts for his first year in office. Ron Paul has been talking about balancing the budget and shoring up the dollar for decades. Not since the days of Nixon-Ford-Carter stagflation has Ron Paul's stable currency message been so important.
Rick Perry has at least taken a few swings at the Federal Reserve. He has a history of balancing the Texas state budget. This are both encouraging signs, but insufficient to sway me to his camp. Rather, talk about reining in the Federal Reserve has taken the back burner for Perry as he has pivoted to his flat tax.
Herman Cain, on the other hand, is building his campaign on the gimmicky (albeit not meritless) 9-9-9 plan. We should remember that Cain is a former employee of the Federal Reserve who has called the Fed's critics ignorant. He opposed auditing the Federal Reserve. When asked about this during a debate, Cain lied directly to Ron Paul rather than admit his position.
Ron Paul is the man I trust to put in place the right economic policies for America. His vision is the one that history tells us has the best chance of putting America on the right economic path. It may not be popular in the short term, but recall that Reagan's success in slaying inflation and reviving the economy led to a landslide victory. After a decade of relatively close, polarizing elections, the American people don't need another snake oil salesman. We need someone who will unify the country by restoring American prosperity.