“The American people will always do the right thing after they’ve exhausted every other alternative”
– Winston Churchill
Mundell’s Law for Economic Prosperity scores a perfect 100 whenever it has been afforded an opportunity to work its magic – 1922, 1962, and 1981. All were followed by many years of steady, superior GNP growth, low inflation and low unemployment. This state of affairs was once thought impossible to achieve.
The approach worked its magic in two important ways. First by lowering marginal tax rates – the rate paid on the next dollar of income or profit – the right incentives were put in place to increase work, savings and investment. With more disposable after-tax income, consumers could spend more and business profits were likewise increased, boosting returns on capital and business re-investment into the economy.
The second crucial element was currency stability. With a stable dollar value and investment opportunities instilling confidence, U.S. dollars were released from idle accounts and likewise capital flowed from overseas to support U.S. growth of real output as opposed to the price level through inflation. Always, the result was real GNP growth per capita well above average and rising employment, rising wages and salaries without inflation.
Today we have drifted far away from these vital national policies. Our taxes are among the highest in the world with talk of higher rates yet. Our federal government’s unprecedented expansion of rules and regulations impede the progress of the 27 million businesses trying each day to move forward, and make a better life for themselves, their associates and the country as a whole. In foreign trade transactions the dollar continually gyrates between under valuation and over valuation.
In the U.S., the dollar today has lost 98 percent of its value over the last century.
The Federal Reserve has abandoned all pricing rules for interest rates and money creation in favor of its own discretion into an Alice in Wonderland world of ZIRP (zero interest rate policy) and negative real interest rates.
All this despite the plain, historical record of what works and what doesn’t over the last 100 years.
Charles Krause lives in Peterborough.