The Mun­dell-Laf­fer sup­ply-side so­lu­tion

The Washington Times Weekly - - Commentary -

Team Obama is in eco­nomic trou­ble on two fronts right now: The dol­lar could be headed to­ward its demise, while the jobs and un­em­ploy­ment num­bers have got­ten worse. (The un­em­ploy­ment rate is up to 9.8 per­cent as of the Septem­ber re­port re­leased two weeks ago.) And there’s a sim­ple pol­icy mix the White House could adopt to fix this. It could en­act the Mun­dell-Laf­fer sup­ply-side ap­proach of a steady King Dol­lar for price sta­bil­ity and low mar­ginal tax rates to spur jobs and eco­nomic growth.

Columbia pro­fes­sor and No­bel Prize win­ner Robert Mun­dell and Rea­gan ad­vi­sor Arthur Laf­fer put this for­mula to work nearly 30 years ago, and it launched a mas­sive low­in­fla­tion, bull-mar­ket pros­per­ity. Of course, I am a sup­ply­side fos­sil. I am a di­nosaur and a relic of the past. But I still be­lieve this ap­proach could work again, even if it’s not go­ing to hap­pen.

The dol­lar has been fall­ing on and off for nearly 10 years, and it’s in big trou­ble right now. The com­mod­ity inflation, hous­ing bub­ble and oil shock of re­cent years all can be traced to dol­lar weak­ness and ex­cess mon­ey­cre­ation by the Fed. A weak dol­lar helped de­stroy the Bush Boom and cre­ate the Great Re­ces­sion. But now peo­ple are talk­ing about end­ing the dol­lar’s re­serve-cur­rency sta­tus.

Ac­cord­ing to Lon­don’s In­de­pen­dent, the Arab oil pro­duc­ers in the Gulf are plan­ning with China, Rus­sia, Ja­pan and France to end dol­lar trans­ac­tions for oil and move in­stead to a bas­ket of cur­ren­cies that might in­clude the Ja­panese yen, the Chi­nese yuan and the euro, along with gold and some kind of re­gional Gulf-state cur­rency.

I say, where there’s smoke there’s fire. The dol­lar-demise story just won’t go away, and it’s clear now that China and oth­ers have lost con­fi­dence in the green­back. For the U.S., this is mostly a self-in­flicted wound. And the Trea­sury and the Fed are in de­nial about it. The gold price has jumped all the way to $1,050, while the dol­lar in­dex has fallen again. Without ques­tion, the U.S. is cre­at­ing too many dol­lars through the Fed, and fis­cal dis­ar­ray con­tin­ues to threaten more of the same.

And here’s a real con­flict brew­ing in the fi­nan­cial mar­kets: The Fed is fight­ing de­fla­tion with a near-zero in­ter­e­strate tar­get, while gold, the dol­lar and com­mod­ity mar­kets are sig­nal­ing that inflation is the real prob­lem. Some­body is go­ing to be very right here, and some­body is go­ing to be very wrong. I’m bet­ting on the mar­kets be­ing right.

So I have a thought, at least for the short run: The Fed should fol­low Aus­tralia, the first G-20 coun­try to raise its tar­get in­ter­est rate. The Aussies lifted their rate a quar­ter point to 3.25 per­cent. Right now, the U.S. Fed should lift its tar­get rate by 25 ba­sis points. The fed funds tar­get is cur­rently 15 ba­sis points, so this move would make it 40 ba­sis points. It would be a dol- lar-pro­tec­tion sig­nal; a prices­ta­bil­ity sig­nal. At the least, it would be a beginning. Next, the Trea­sury should buy some dol­lars in the open mar­ket to back up the Fed.

And as the White House con­sid­ers a sec­ond stim­u­lus pack­age, here’s an­other thought: Go for growth. Re­duce tax rates to pro­vide growth in­cen­tives (some­thing Team Obama has avoided like the plague). Cut the top cor­po­rate tax rate from 35 per­cent to 25 per­cent, and ac­com­pany that with a small­busi­ness tax cut from 35 per­cent to 25 per­cent. And leave the Bush tax cuts alone. Don’t let them ex­pire in 2011. That’s cap-gains, div­i­dends and the top per­sonal rate.

Yes, this is a sup­ply-side so­lu­tion: Re­duc­ing tax rates will ig­nite growth in­cen­tives.

And by ap­ply­ing it, Team Obama would be bor­row­ing from Ge­orge W. Bush, Bill Clin­ton, Ron­ald Rea­gan and John F. Kennedy (and Calvin Coolidge and An­drew Mel­lon, too). For­get about Key­ne­sian spending mul­ti­pli­ers, which Har­vard’s Robert Bar­row writes are less than one. For­get about class war­fare. For­get about in­come re­dis­tri­bu­tion. Go for growth.

Again, I know I’m a sup­ply­side fos­sil and a relic of the past. But the Mun­dell-Laf­fer pol­icy plan — which has worked his­tor­i­cally for Repub­li­cans and Democrats — could truly save the na­tion and its econ­omy at this crit­i­cal junc­ture. Mon­e­tary re­straint and the in­cen­tives of lower tax rates will solve the dol­lar and un­em­ploy­ment prob­lems.

In our sup­pos­edly post-par­ti­san era, why not give it a try, Pres­i­dent Obama?

Lawrence Kud­low is a na­tion­ally syndicated colum­nist.

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