Mark Zaccaria concludes his response to Bruce Bartlett’s postulates on the relationship between deficits, monetary policy, interest rates with some specific economic suggestions of his own…
Raise Interest Rates: Money is like water, in that if you want it to flow you have to tilt the table. With effective rates at zero there is no incentive whatsoever to risk private capital on innovation or new infrastructure. Even if the start-up you back is a success it could be that all you’ll get in return is the original check you invested in it. Using federal capital is not the answer. Deficit spending will always go to pork and pet projects because of the political process that has to take place to authorize it in the first place. (Remember: Inefficient Spending).
I am certainly not counseling a return to the double digit primes of the Carter Administration. To get money now sitting on the sidelines back into the game and then to get it moving more quickly there has to be an incentive. So far the best one ever devised is Profit.
Create Industries, not just Programs: Recently the federal government arranged for massive loans to be made to Chrysler and GM to keep them afloat in their present configurations. Their present configurations are the problem. That loan money will be spent to perform high cost manufacturing of products consumers don’t want. If the government had, instead, created a tax credit or other individual incentive to BUY any American automobile it would have created demand that favored the low cost producers and those with the best products to sell. That still might have cut Chrysler and GM out of the transaction, but it would have made them move a whole lot faster to shed inefficiencies and focus on strengths. To put it another way, nobody ever runs as fast as they do when their hair is on fire. As it stands, politicians may claim some short term victory because employees of these two behemoths will get their pay checks for a couple more months. It just puts off the inevitable, though, and you have to wonder if the loans were a better idea than just having a bonfire with the Hundred Dollar Bills on the East Lawn of the White House. The fire would at least rein in the money supply slightly.
Federal action on the requests from the car makers is just one example of a policy that has to change…because it won’t work. Look at what’s happening to the big banks. They are being nationalized through deficit spending to bail them out. I say nationalized because their new venture capitalist, the US Government, is imposing all sorts of requirements on them. You may think its just deserts to force limits on executive pay or make them send back a private jet or two. When the US Government insisted that the payment of dividends be suspended until its loans were repaid, however, it effectively downgraded the investment value of the banks’ common stock to zero. Have you been watching? As I write this Citi Group is trading at just above $2.00 per share, a 52 week low (of course), down from nearly $30.00 per share last year. Bank of America? Today it’s trading around $3.50 per share, down from well over $40.00 last year. The Shareholder of last resort? You and Me, in the form of our federal government. I call that nationalizing the banks.
The programs the government devises are inherently flawed because they do not take market forces into account, only political forces. It’s time for government to start promoting manufacturing and get out of the business of owning equities. And what’s the best way to do that?
Reduce Government Spending: The trillion dollar emergency bailout will not work but it will run up the balance on our National Credit Card such that we will all be indentured servants of the government for generations. It is exactly the wrong thing to do. If the government reduced spending it would also reduce BORROWING. That would leave more money available for productive use by the private sector, the one more likely to make efficient decisions with money.
Reduce Marginal Tax Rates: When you cut taxes you create new taxpayers. The net dollar impact of that larger taxable base is an increase in the overall number of dollars flowing to the US Treasury. That may sound counterintuitive but it has worked every time it’s been tried. Look at the Kennedy Tax Cuts in 1961, or the Regan Cuts in 1981, or the Clinton edition of tax cuts in 1997. The money may not have always been used wisely but it has always materialized.
This time let’s bring in the extra income and resolve to use it in the best interests of re-establishing a conservative financial foundation for the United States of America.
Conclusion
Mr. Bartlett has far more big government experience than I do, but that very fact may prejudice his judgments. He may be like a military general fighting the last war rather than this one. Things may be sufficiently different today to make the policies that worked for Mr. Bartlett in the past unusable today. Two of those changes are the massive accumulated debt and the nearly complete globalization of the economy. New times demand a new analysis of the environment and fresh approaches to having government fulfill its most fundamental responsibility: to protect the people.
Mark Zaccaria is a small businessman in North Kingstown. He is a former member of the North Kingstown Town Council and was the Republican Candidate for the state’s District 2 seat in Congress in 2008.