Politics & Policy

Sustaining The Boom

Tax cuts and sound money.

The great genius of supply-side economics (which is simply classical economics revived as an alternative to Keynesianism in the 20th century) is that it properly separates fiscal policy from monetary policy. The Keynesian diversion attempted to link economic growth with inflation and economic stagnation with deflation. It did this because it focused almost entirely on America’s great depression and excluded from its model-making process data from other periods of time. Then, along came Jimmy Carter. The economy in the late ’70s was shrinking at the same time that prices were growing. This was the first empirical blow to the Keynesian model. Then came Ronald Reagan, who grew the economy in the ’80s and tamed inflation at the same time. From that point on, anyone who was serious about the data could no longer be a dogmatic Keynesian.

That is, until now.

For some strange reason the present weakness of the dollar has been blamed on all sorts of macroeconomic effects that really have nothing to do with it. This is not meant to imply that the falling dollar is a good thing. It is not. The chart above shows that our two most recent great booms occurred in an environment of stable dollar valuation. And when we refer to stable dollar valuation, we mean with reference to gold prices.

After the stagflation of Jimmy Carter, Reagan brought the money supply under control and pulled gold down to its more historic levels of valuation. His restoration of the dollar provided the stability necessary for nearly 20 years of economic boom. The same is true for the Clinton years, which prove that supply-side economics works for anyone.

Fed chairman Alan Greenspan’s insistence on a strong dollar against the Left’s desire for competitive devaluation was backed by President Clinton. The results were a reinstitution of the conditions of the earlier Reagan boom. The president in office now has accomplished a great deal through tax cuts. As long as the Fed thinks that gold prices matter and that it can’t run the printing press as long as it desires, the Bush boom will continue.

— Jerry Bowyer is author of The Bush Boom and an economic advisor to Blue Vase Capital Management. He can be reached through www.BowyerMedia.com.

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