Home inFocus Defending America From ‘Stagflation’

Defending America From ‘Stagflation’

Jack Kemp Summer 2008

In the early 1970s, as I began serving in the U.S. Congress from Buffalo, New York, I remember the shame I felt over President Richard M. Nixon’s Watergate follies. My shame turned to disgust over Nixon’s wage and price controls, his tax and tariff hikes, and his devaluation of our currency.

As the country divided over the Vietnam War, stagflation began to appear, first under Nixon, and then surging under President Gerald Ford. The problem reached its most dangerous heights under President Jimmy Carter.

Stagflation didn’t end until the early 1980s when President Ronald Reagan began cutting tax rates on both labor and capital investment, while Paul Volker, Chairman of the Federal Reserve Board, sharply tightened monetary policy. This was the right combination of fiscal, tax, and monetary policies that ended the dangerous convergence of inflation and recession. Volker’s prescription is exactly what we need now.

Chauvinists vs. Nihilists

In those dark days of economic malaise, Watergate crimes, and fierce debates over the Vietnam War, John Gardner of the government accountability watchdog group, Common Cause, wrote something in Newsweek I’ve never forgotten: “America is caught in a crossfire between the ‘uncritical lovers’ and the ‘unloving critics’.” Gardner’s observation of the clash between the chauvinists, who saw nothing wrong in America, and the nihilists, who wanted America to implode and to be rebuilt into a new “socialist” model, was the perfect metaphor for the 1970s.

More than three decades later, Gardner’s observation can be aptly applied to some of America’s current debates. Indeed, the frustrations over the Iraq War and warnings of a new round of stagflation have reignited the arguments between the chauvinists and nihilists.

This heated debate will undoubtedly bring questions surrounding the economy into sharp relief this fall. With a crippled dollar, weak or negative gross domestic product (GDP) numbers, a volatile stock market, and too many Americans losing their homes and even their nest eggs, a conservative economic course for our nation is desperately needed. Indeed, this country must adopt policies that will actually lead to strong economic growth while stunting these dangerous stages of dollar weakness and inflation.

Interest Rates and the Greenback

How can we shore up the dollar while also spurring strong economic growth? Conventional wisdom states that this would be extremely difficult. Indeed, critics argue that if the Fed begins to raise interest rates, which typically strengthens the dollar, this could pose a serious challenge to economic growth, since it makes borrowing money more expensive.

As David Malpass, chief global economist at Bear Stearns, points out, economic stimuli and interest rates aren’t always Siamese twins. “Many countries with low interest rates have had strong currencies, including the German mark in the 1960s, and the euro now,” Malpass noted.

“The dollar strengthened in the first years of the Reagan administration when he focused on it and put in good economic policies,” Malpass continued. “We should do that again. The U.S. is a great country and the dollar is normally a great currency.”

Ax the Tax Code

As I have argued throughout my political career, moving our nation towards a flatter, fairer, and simplified tax code that is both pro-growth and pro-family, while strengthening the investment climate here in America, will immediately strengthen the demand for the dollar here and around the globe. Our nation must devise a tax policy for the 21st century that both recognizes the need for a competitive economy in an increasingly flattening world, while also encouraging capital formation and job creation here at home.

There are a number of specific tax policies that can help America successfully combat inflation, stave off a recession, and even jumpstart our economy. This would include: cutting corporate tax rates from 35 percent to 25 percent; expensing all investment in machinery, equipment, and technology; making permanent the 15 percent tax rate on capital gains, dividends, and estates; and eliminating the Alternative Minimum Tax (AMT).

There are those who argue that what our country needs is higher taxes, specifically for more wealthy Americans. This is empty and populist rhetoric. Sapping the resources of the rich and redistributing wealth will only weaken America’s investment climate, further weaken the dollar, and in the end, exacerbate stagflation.

There is no empirical evidence whatsoever that our economy can be strengthened by raising tax rates on labor, capital, and the factors of production. In other words, “soaking the rich” ends up soaking the poor.

A Winning Economic Platform

Progressive-conservative economic policies helped the Ronald Reagan administration pull America out of a dangerous economic environment in the early 1980s. This country cannot afford to ignore what Reaganomics taught us. Non-inflationary growth has the best (and only) chance of turning the U.S. economy around, before stagflation sets in.

Jack Kemp is chairman of Kemp Partners in Washington, DC. He was a New York congressman from 1971 to 1989, the Housing Secretary in the George H. W. Bush administration, a presidential candidate in 1988, and a vice presidential nominee in 1996.