How to Think About the Present Economy

John ArmstrongEconomy/Economics

I try to reflect on a number of issues—spiritual, theological, political, social and economic. I am an amateur in so many of these areas but that never stops me from thinking and writing. I am one who loves to be stretched and to challenge ideas, my own and yours. One friend who has helped me to think a great deal better about the economy is David Bahnsen. David is a professional financial advisor and a member of our ACT 3 board. He wrote the following piece for several publications and allowed me to reprint it. Even if you protest his language his basic ideas seem so patently obvious as to be quite hard, if not impossible, to refute.

It is indisputable to those with functioning sensory skills that the economy is in the midst of substantial turmoil.  Brought on by the bursting of a housing and mortgage bubble, the excess of which defies the imagination even of the dotcom atrocity, large sectors of the economy sit at a crossroads, and the financial system at-large is struggling to nurse its way through a deserved hangover.  When and how credit conditions will return to a place of health is unknown.  The Fed is pumping the system with easy money, hoping to "reflate" the economy, but job growth is slowing, corporate earnings are decelerating, and consumer spending appears to be preparing to [finally] reverse.  The dollar is at record lows, and Gold is at record highs.  And yet, in the midst of textbook conditions for pro-growth policies, we seem to have stooped to new lows of economic illiteracy in the political class.
Bahnsen_2 I have learned a lot from Larry Kudlow over the years, and even more so from his heroes, Arthur Laffer, and Milton Friedman.  The Keynesian notion that unemployment and inflation always move in reverse correlation was fully rebuffed in the 1970’s.  The idea that politicians could expand the money supply to help the economy (unemployment), and raise taxes to fight inflation, was dismantled by Milton Friedman for the folly that it was – Keynesian nonsense wholly ignorant of the reality of what inflation was: too much money chasing too few goods.  Higher tax rates stifle production, not to mention investment.  When the printing presses are left on, accompanied by an easier and easier cost of borrowing (Fed rate cuts designed to motivate Americans to do what they do best – borrow, and spend), the result is this: Demand increases (more "money" available in the system), while Supply decreases (goods and services held down).  Inflation goes up, and unemployment goes up with it.  The result is called "stagflation", and it was the gift of Keynesianism to Jimmy Carter’s Presidential term.  It also nearly ruined the American economy.
But of course, the American economy is difficult to hold down.  We produce and consume like no society ever has in Western history.  And in a day and age of globalization, it is hard to stay pessimistic forever.  However, to hear members of the political class decry the concepts of free trade and globalization that increase both the supply, and demand, of goods and services, one has to wonder where their economic education took place.  Sadly, this criticism belongs at the feet of both sides of the aisle, with Democrats like Nancy Pelosi and John Edwards and Charles Schumer, along with Republicans like Lindsay Graham and Mike Huckabee all joining in on the protectionist chorus.  But even worse, in the midst of a period where pro-growth stimulus to producers and investors has never been more important, those leading the polls in the next Presidential election continue to promise increases in taxes to those making Main Street tick.  Both Hilary Clinton and Barrack Obama, neck and neck for the Democratic nomination, not only are open and non-subtle in their rhetoric of class warfare and "soaking the rich", they specifically promise to increase the capital gain and dividend tax cuts that have been so pivotal to the economic recovery of the last five years.  Corporate tax rates must be cut.  Marginal income rates must be maintained (or even better, simplified, consolidated, and reduced).  But to increase the money supply without also cutting rates on producers is unconscionable for those concerned with the morality of economics. And for those concerned with economic literacy, it is unforgivable.