Economic growth, not austerity, is the answer to inflation

Lawrence Summers answers questions during an interview in Venice, Italy, July 9, 2021.


Luca Bruno / Associated Press

Lawrence Summers, who was Bill Clinton’s Treasury Secretary, rocked Democrats last year when he predicted that his party’s excessive spending would cause inflation. He was right. But now he was wrong. On June 20, he told Bloomberg that “we need 5 years of unemployment above 5% to contain inflation” – or maybe 1 year of 10% unemployment. That would put millions of Americans out of work.

Mr. Summers echoed the advice of his uncle, Nobel laureate in economics Paul Samuelson, who famously wrote in 1980, a period of double-digit inflation, that “5 to 10 years of austerity, during which the unemployment rates rising to 8 or 9 percent on average, and real output growing at only one or two percent a year, could complete taming U.S. inflation. ”

Walter Heller, Chairman of the Council of Economic Advisers under Presidents John F. Kennedy and Lyndon B. Johnson, similarly predicted that the 1981 Reagan tax cuts “will soon create skyrocketing deficits and inflation. growth is high”. He was also wrong. From January 1, 1983, when the tax cuts went into effect, to June 30, 1984, the real gross domestic product of the United States grew at an average annual rate of 8%. Inflation collapsed.

Factors driving inflation vary – excessive government spending, printing too much money, currency devaluation, shortages of specific and general goods and services. Once in the economy, they can create persistent inflation. The secret to curing inflation is not the economic downturn and high unemployment, but the opposite: pro-growth policies create incentives for more goods, more jobs, more government spending. less government and more money. As the economy produces more, prices go down.

In contrast, austerity means fewer goods produced and fewer jobs. How does putting people out of work and reducing the supply of goods cause the price of goods to fall?

History shows that growth does not cause inflation. In the 1920s, when the top tax rate was cut from 73% to 25%, real GDP skyrocketed and the price level fell. During the 1960s, tax cuts and pro-growth policies led to economic expansion, stable prices, and a budget surplus.

One mistake of the Reagan plan was to cut taxes in phases instead of implementing them all at once. That contributed to the deep recession of 1982. Congress and President Trump avoided this pitfall in the Tax Cuts and Jobs Act of 2017, which avoided a recession and kept inflation at bay. at a very low level. Before Covid hit, we had the best in the world: the lowest unemployment rate in 50 years, 2% inflation, and steady real income growth for almost all Americans.

We don’t need austerity. End President Biden’s war on energy, permanently cut taxes, deregulate, reduce government spending, and tighten monetary policy immediately by selling off some trillions of assets. dollars on the Federal Reserve’s balance sheet — it’s a recipe for low inflation and low unemployment.

Mr. Laffer is the president of Laffer Associates. Mr. Moore is a senior fellow at the Heritage Foundation. They are the co-founders of the Prosperity Liberation Committee.

Magazine Editors Report: The President says the price is not his fault. Image: AFP / Getty Images Synthesis: Mark Kelly

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