Government Economic Policy Without “Stimulus”

For now, every perceived ill in society is met with big government spending programs. This is sometimes called “stimulus,” in the model of Keynesian notions dating back to the 1930s, although I think it has burst the bounds of that concept. (Some are now calling it “fiscal relief.”) The notion that this can all be financed with the central bank printing press has made everyone giddy. It appears that we can all get money from the government, and nobody has to pay for it. Joe Biden has said that he will back a new spending program of $2.4 trillion for 2021, which is about 12% of GDP, this coming on top of “structural” and “cyclical” deficits of about 8% of GDP expected for 2021, all before any more spending (from a long list) that might be undertaken before the end of 2021, or after then.

Eventually, I think we will come to a point at which this sort of thing collapses under its own weight, probably when we get tired of printing money to pay for all of it. This might come before the end of 2022. Thus, it is a good idea to start thinking now about government economic policy without all this spending, basically with no “stimulus” spending at all.

This is actually the regular policy of many successful countries, including the United States before the New Deal. The idea was that government would simply do its job, and do it well. Even the New Deal deficits of the late 1930s, which seemed enormous at the time, were only about 4% of GDP. Otherwise, people were on their own.

This basic framework is still followed today by some of the better-governed places in the world. In the 2009 crisis, Hong Kong actually ran a small surplus. Singapore’s biggest deficit in the last 25 years was -1.2% of GDP. They have had economic downturns, and quickly recovered afterward.

This was also the regular practice of the United States before the New Deal; and even after then, big deficits were rare until the 1980s. Two pillars of government economic policy were: Stable Money, and Low Taxes. The Stable Money came from the gold standard. The dollar’s value was fixed at $20.67 per ounce of gold from 1792 to 1933. After a devaluation in 1933, it was $35/oz. until 1971. Before the Sixteenth Amendment of 1913, there was no income tax in the United States. The basic taxation principle was “uniformity” (the uniformity clause, Article I Section 8), which basically meant: one tax rate for everyone. Today, we have a number of “uniform” taxes, including the retail sales tax and the payroll tax (although there is an upper limit to which it applies). They seem to work well. After a century of wrestling with the consequences of “discretionary taxation,” already by the 1980s a consensus emerged that the most effective forms of taxation were broad, simple, uniform taxes. In the U.S., this gave rise to both the Flat Tax and FairTax proposals.

So, if we are to imagine a completely different approach to government economic policy, but one that is based on the successful examples from two centuries of thought and experimentation, it should include Stable Money and Low Taxes; specifically, uniform one-rate taxes. Spending should focus on maintaining military defense and domestic justice. The rest of it we simply abandon; you are on your own.

Again, we see that Hong Kong and Singapore do this. They have tax systems that are nearly “flat taxes,” with a top rate of 17% in Hong Kong and 22% in Singapore. The Hong Kong dollar has long been pegged to the U.S. dollar (”Stable money”), and there is no domestic “monetary policy” of economic manipulation via currency-jiggering. Singapore has almost the same system, but uses a currency basket.

With such a business-friendly environment, it is no surprise that their economies bounced back to good health quickly after downturns.

I know that many people’s heads are about to explode here. They really, really want their government handouts. But, this was basically the U.S. government’s response to the Spanish Flu pandemic of 1919. The Federal government actually ran a surplus in 1920, and every year for the next decade. People got by, and soon afterwards they were enjoying a splendid economic boom during the Roaring Twenties, which was fueled by large tax reductions. The top income tax rate fell from 73% in 1920 to 25% in 1925. You could say that reducing tax rates had nothing directly to do with the Spanish Flu, or the business difficulties and unemployment caused by it. You could argue that it was “unfair” to reduce taxes on the highest incomes, when often it was those with no income at all that were hardest hit by economic difficulties. But, this had everything to do with the economic recovery that soon followed. Unemployment plummeted. The U.S. dollar’s value, which had effectively become a floating currency during WWI, was relinked to gold in 1920.

Before this Crisis Era is over, I think we will have to reconsider the role of the Federal government. Secessionist movements may erupt. Already, people are fleeing California for Texas or Florida, due to high taxes in California. What are these people going to think if Joe Biden and his crew impose California-like taxes on the whole country?

One solution is simply to devolve a lot of taxing-and-spending questions to the States. Let California tax and spend as it sees fit. The Federal government is out of the welfare business, just as it was before the Great Society programs of the 1960s. The Federal government basically spends its money on national defense, debt service, and little else (ideally, Social Security would also be reformed by then.) This could be financed with a low, uniform tax like a national sales tax or VAT, with a rate of about 10%, eliminating all income and payroll taxes on the Federal level (although they may remain at the State level).

Just like Hong Kong and Singapore today, this policy doesn’t change with economic ups and downs.

A Federal government of this sort does not engage in “stimulus” spending programs. It just maintains a healthy environment for business, with the confidence that, before too long, the result will be a strong economy.

Since the Federal government doesn’t run big deficits, it also avoids some of the problems that commonly follow soon after these big spending programs. Often, governments’ next step is “austerity” in the form of big tax hikes. That’s what happened in Europe in 2010-2012, and in the U.S. 1932-1940. We don’t end up with a big debt load after piling on more debt in every recession. We don’t have to put pressure on the central bank to finance the deficits with the printing press, or suppress interest rates to keep debt service costs from ballooning to an unsustainable level. If a government gives up “stimulus,” it can more easily embrace the Magic Formula: Low Taxes, and Stable Money.

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