Fed Embraces Supply Side Economics, Dumps Jerry Brown

Ten years from now university economists will analyze Federal Reserve Chairman Ben Bernanke’s recent presentation to the U.S. Senate Budget Committee as the successful turning point in American economic policy from a focus on demand side consumption spending to supply side production investment.


As Bernanke clearly stated:
“We need to think about making investments for the future as opposed to simply spending our seed corn on current needs. So thinking about government programs, we should ask the question, will this provide benefits in the future." ...

“On the tax side, I don't think it's really very controversial among economists that rising rates, combined with a multiplication of exemptions, deductions, credits and so on, leads to a tax code which is very complex and can distort economic decisions.”

For the last decade our nation’s economy grew at an above average rate of 3.8% rate, tax revenue grew at the average rate of 2.5%; but government spending exploded at 13.7% growth rate. Fed Chairman Bernanke’s new found appreciation for getting government out of the way of the private sector only comes after America’s government debt burden has reached a Greek like 127% of our economy. With gold soaring, unemployment at record highs and serious efforts underway to eliminate the dollar as the world’s reserve currency; the US is clearly in trouble. To put the debt in personal terms, the US government debt burden equals $103,692.20 for every working American.

The Chairman’s rejection of bailouts nullified the intensive lobbying efforts by California and other state and local municipalities for a Federal debt guarantee. Having run-up over $3.5 trillion of municipal bond and pension obligation debts in the last decade, state and local governments are now facing widespread defaults. Newly inaugurated California Governor Jerry Brown, who many blame for passing legislation 30 years ago that permitted the Golden State to become the perennial poster child of deficit spending, just announced a six month moratorium on all state borrowing.



A solemn Brown said:
“I am too old to play games anymore; we have to come up with a serious budget right now that reflects serious reality.”

Notice how Brown used the word “serious” twice in the same sentence. Facing a $28 billion deficit, stratospheric borrowing costs and a coming state downgrade to “junk”, Brown is in a very serious situation. An internet search of quotes from the former Catholic seminarian, Buddhism student and Moonbeam politician found no references to “serious”. Common themes included:
“The conventional viewpoint says we need a jobs program and we need to cut welfare. Just the opposite! We need more welfare and fewer jobs.”

Bernanke knows the last time America stood on the precipice of collapse was in 1979, when President Carter gave his famous “Malaise Speech”. The speech asked the American people to accept the “New Normal” that Japan would become the dominant world power and Americans would rely on government spending to cushion their diminished expectations. Carter was actively trying to distort the economy to pay for his government cushion attempting to raise the top income tax rates to 90% and the inheritance tax to 77%. His policies resulted in the Federal deficit soaring, price of gold doubling, unemployment rising to post-depression highs of over 10% and international calls to end the US dollar’s dominance.

Federal Reserve Chairman Paul Volker finally refused to print more money to support Carter’s deficit and the spending game ended. The next year Ronald Reagan swept into office on the supply side economic platform of cutting taxes and limiting the intrusion of government into the private sector. President Reagan reminded Americans: “Facts are stubborn things”. Reagan emphasized: “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” He understood: “Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”

University professors screamed that President Reagan’s policies would destroy the country. But over the next twenty years his common sense supply side policies slowed the growth of the national debt, the price of gold collapsed, unemployment fell steadily from 10.8% to 4.6%, the Japanese economy wilted and the US dollar was again dominant.

Bernanke’s comments appear to be having a positive economic effect as university professors like Paul Krugman are again screaming supply side economics will destroy the nation. Perhaps we should remember the wisdom of my favorite university professor who had a real working knowledge of economics, Dr. Ray Stanz of the Ghostbusters (Dan Akroyd’s character):
“Personally, I liked working for the university! They gave us money and facilities. We didn’t have to produce anything. You’ve never been out of college. You don’t know what it’s like out there! I’ve worked in the private sector... they expect results!”

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