The Proven Solution to Inflation – Washington Times
For most Americans, inflation has become public enemy number one. After all, the rate of inflation is at a 41-year high of 8.5%, costing the average American family $327 a month, with no signs of slowing down any time soon.
While much has been said about who or what is responsible for the current inflation crisis, a much more relevant question remains too often ignored: how can we solve it?
Fortunately, from past precedents, we know that there is a very simple solution which, if implemented, would bring inflation down.
The solution relies on a two-pronged approach.
First, increase the value of the dollar.
Second, increase the production of goods and services.
Because inflation, at its most basic level, is too many dollars chasing too few goods and services, reducing the money supply while increasing the production of goods and services solves both of these problems in one go. kick.
Of course, that’s easier said than done.
Since the financial crisis of 2008, the Federal Reserve has been printing money at an absolutely appalling and unsustainable rate.
In 2007, the Federal Reserve’s balance sheet was less than $1 trillion. Today it stands at $8.9 trillion. Even more telling, the M2 money supply – which measures the total number of dollars in circulation – has grown from $7.5 trillion at the end of 2007 to $22 trillion at the time of this writing.
For too long, the Federal Reserve has pumped money into the system via rock-bottom interest rates, degrading the value of the US dollar.
While this will be painful in the short term, it is imperative that the Federal Reserve backtrack and raise interest rates. Thankfully, it looks like Jerome Powell, Chairman of the Federal Reserve, has finally come to this conclusion. However, it remains to be seen whether he will stay the course or resort to “accommodative” monetary policy if an economic slowdown occurs in the meantime.
While reducing the money supply solves part of the inflation problem, it is also essential to put in place policies that encourage economic growth and innovation. Arguably, this is best done when the government lowers personal and corporate taxes while reducing regulations and other impediments to economic growth.
Currently, the US corporate income tax rate is 21%. Although many Democrats are calling for this tax and others to be increased, it would have a deleterious impact on current production levels. On the contrary, if corporate income taxes were to be reduced, businesses would be awash with cash, which would spur job creation, innovation and greater prosperity.
Reducing (and simplifying) personal tax rates would also have a huge impact on economic growth, as it would put more money in people’s wallets, allowing them to increase their discretionary spending while increasing their level. of life.
Although tax rates tend to be the focus of politicians, we would be remiss to ignore the economic effect of the regulatory leviathan at all levels of government in the United States. As the U.S. Chamber of Commerce notes, “Beyond the federal level, small businesses face a maze of red tape from state and local governments to start a business, apply for a business license or professional, hire employees, pay taxes, enforce contracts, and even close a business. Regulatory complexity is death by a thousand cuts for America’s small businesses. »
Fortuitously, for those who advocate these common-sense solutions, we also have plenty of historical evidence that proves that they are a winning formula for fighting inflation.
In the early 1920s, the United States was caught in the grip of the post-World War I recession. Due to exorbitant wartime expenditures, a gigantic regulatory state to guide wartime production, and onerous taxes to support wartime costs, the American economy was at an all-time low. However, that all changed fairly quickly, when President Warren G. Harding entered the Oval Office and cut spending, cut red tape and cut taxes, ushering in a decade of prosperity known as the 1960s. crazy.
This same playbook was used by President Ronald Reagan, who inherited an economy stuck in stagflation. By raising interest rates, then cutting taxes, reducing regulations and at least trying to get federal spending under control, Reagan’s inflation-fighting policies produced a 30-year economic boom that gave birth in the information age.
As mentioned earlier, adopting these policies is easier said than done. Austerity is not always popular in the short term. Neither will rising interest rates, which make major purchases like cars and homes much more expensive.
However, for too long we have allowed these problems to escalate. The longer we wait, the worse it will get. At this point, we just have to take our proven economic medicine.
• Chris Talgo ([email protected]) is editor-in-chief at the Heartland Institute.