America's Great Depression Murray Newton Rothbard

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.But if the government raises taxes in order to stave off that price rise, the consumer is getting nothing in return.He simply loses his money, and obtains no service for it except possibly being ordered around by government authorities he has been forced to subsidize.Other things being equal, a price rise is always preferable to a tax.But finally, inflation, as we point out in this work, is not caused by deficits but by the Federal Reserve’s increase of the money supply.So that it is quite likely that a higher tax will have no effect on inflation whatsoever.Deficits, then, should be eliminated, but only by cutting government spending.If taxes and government spending are both Introduction to the Fourth Editionxxslashed, then the salutary result will be to lower the parasitic burden of government taxes and spending upon the productive activities of the private sector.This brings us to a new economic viewpoint that has emerged since our last edition—“supply-side economics” and its extreme variant, the Laffer Curve.To the extent that supply-siders point out that tax reductions will stimulate work, thrift, and productivity, then they are simply underlining truths long known to classical and to Austrian economics.But one problem is that supply-siders, while calling for large income-tax cuts, advocate keeping up the current level of government expenditures, so that the burden of shifting resources from productive private to wasteful government spending will still continue.The Laffer variant of the supply-side adds the notion that a decline in income tax rates will so increase government revenues from higher production and income that the budget will still be balanced.There is little discussion by Lafferites, however, of how long this process is supposed to take, and there is no evidence that revenue will rise sufficiently to balance the budget, or even will rise at all.If, for example, the government should now raise income tax rates by 30percent, does anyone really believe that total revenue would fall?Another problem is that one wonders why the overriding goal of fiscal policy should be to maximize government revenue.A far sounder objective would be to minimize the revenue and the resources siphoned off to the public sector.At any rate, the Laffer Curve has scarcely been tested by the Reagan administration, since the much-vaunted income tax cuts, in addition to being truncated and reduced from the original Reagan plan, were more than offset by a programmed rise in Social Security taxes and by “bracket creep.” Bracket creep exists when inflation wafts people into higher nominal (but not higher real) income brackets, where their tax rates automatically increase.It is generally agreed that recovery from the current depression has not yet arrived because interest rates have remained high, despite the depression-borne drop in the rate of inflation.The Friedmanites had decreed that “real” interest rates (nominal rates Introductionxximinus the rate of inflation) are always hovering around 3 percent.When inflation fell sharply, therefore, from about 12 percent to 5percent or less, monetarists confidently predicted that interest rates would fall drastically, spurring a cyclical recovery.Yet, real interest rates have persisted at far higher than 3 percent.How could this be?The answer is that expectations are purely subjective, and cannot be captured by the mechanistic use of charts and regressions.After several decades of continuing and aggravated inflation, the American public has become inured to expect further chronic inflation.Temporary respites during deep depressions, propaganda and political hoopla, can no longer reverse those expectations.As long as inflationary expectations persist, the expected inflation incorporated into interest rates will remain high, and interest rates will not fall for any substantial length of time.The Reagan administration knew, of course, that inflationary expectations had to be reversed, but where they miscalculated was relying on propaganda without substance.Indeed, the entire program of Reaganomics may be considered a razzle-dazzle of showmanship about taxes and spending, behind which the monetarists, in control of the Fed and the Treasury Department, were supposed to gradually reduce the rate of money growth.The razzle-dazzle was supposed to reverse inflationary expectations; the gradualism was to eliminate inflation without forcing the economy to suffer the pain of recession or depression.Friedmanites have never understood the Austrian insight on the necessity of a recession to liquidate the unsound investments of the inflationary boom.As a result, the attempt of Friedmanite gradualism to fine-tune the economy into disinflation-without-recession went the way of the similar Keynesian fine-tuning which the monetarists had criticized for decades.Friedmanite fine-tuning brought us temporary “disinflation” accompanied by another severe depression.In this way, monetarism fell between two stools.The Fed’s cutback in the rate of money growth was sharp enough to precipitate the inevitable recession, but much too weak and gradual to bring inflation to an end once and for all.Instead of a sharp but short recession to liquidate the malinvestments of the preceding boom, Introduction to the Fourth Editionxxiiwe now have a lingering chronic recession coupled with a grinding, continuing stagnation of productivity and economic growth.A pusillanimous gradualism has brought us the worst of both worlds: continuing inflation plus severe recession, high unemployment, and chronic stagnation.One of the reasons for the chronic recession and stagnation is that the market learns.Inflationary expectations are a response learned after decades of inflation, and they place an inflationary premium on pure interest rates [ Pobierz całość w formacie PDF ]

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