Maybe Ron Paul is on to Something

So the bailout bill fails, and everybody freaks out.  There is pretty good reason to freak out.  Our whole system is built upon a mountain of credit, much of it short-term credit, so when the mountain gives way, the whole edifce comes crashing down.  Fair enough.  The government needs to "do something".

Something else is bothering me though.  What kind of system do we have, if that system is subject to collapse if it doesn’t receive a $700 billion injection from the federal government?

Maybe Ron Paul is right to bang on about our monetary policy that is designed to promote ever-increasing levels of leverage, currency inflation and trade deficits.  Oh yeah, and our fiscal policy that perpetually runs big deficits and seems so manifestly corrupt.  How did things get so unstable?

It’s not just the "anything goes", laissez-faire regulatory regime of the Bush Adminsitration that got us here.  While the extremely loose financial market regulation of the last 7 years brought everything to a head, it was an endpoint we were destined to reach all along.  This process didn’t start in 2000 and it didn’t start in 1980.  It started back in the late 1800s and became the dominant system in the 1930s.

Our current economic system is based on three basic principles: (1) the promotion of inflation; (2) the promotion of consumption and homeownership and (3) relatively open immigration.  This economic system has been traditionally promoted by southern and western states, first by the Democratic Party, then by both parties.

Much of the current government edifce is built to promote inflation, consumption and homeownership while discouraging deflation and savings.  The federal reserve, the progressive income tax, Fannie Mae and Freddie Mac, Social Security, deficit spending, the abandonment of the gold standard, Medicare, the mortgage interest deduction, homestead laws, unionism, high estate tax rates, generous public pensions, low tariffs, loose bankruptcy laws, the interstate highway system, the earned income tax credit, etc.: all are designed to promote inflation, redistribute income to promote consumption and/or stimulate consumer borrowing for homeownership and consumption. Also, think about what happens every time we have an economic downturn…the Fed lowers rates to try to encourage people to borrow against their houses and/or the government sends out rebate checks for consumers to spend.

None of these things are bad, per se.  They’ve just been building up over the past 70 years and have been taken as far as they can go.  The American consumer is as leveraged as he or she can possibly get.  The US government has some scope to borrow more, but not that much scope.  Clearly the US financial system is overleveraged and needs to retrench.  The US balance of payments has been running a deficit for most of the last 30 years, so it’s probably not advisable to increase our borrowing from abroad, either.

On the other hand, US businesses are actually in good shape and are the most competitive in the world.  We should be actively encouraging more business and production to be conducted in the United States.

[It should also be noted that I acknowledge that the old Republican system of high tariffs, restricted immigration and the gold standard collapsed in the 1930s when it, too, was taken too far.  These systems tend to have about 70 years in the sun before they collapse.]

What should a new system look like?  It should promote savings, investment, technological innovation and exports.

  • The tax code should be used to encouraged savings, perhaps moving to a progressive consumption tax
  • Low corporate tax rates and generous deductions for capital expenditures to encourage production in the US
  • Financial regulations that target the leverage of financial companies
  • Remove the full employment mandate from monetary policy a set an inflation target or price rule
  • Currency policy that targets a stable dollar relative to other currencies and limits big swings in international capital flows
  • Federally-supported investment in internal improvements, particularly our transportation, communications and energy infrastructure
  • Funding for high-tech, health, space and military research
  • Encourage more defense spending by our allies and sell them high-tech military equipment
  • Scale back on US defense spending, consider a more limited direct role for the US military
  • Scale back the home mortgage interest deduction and/or eliminate Fannie Mae and Freddie Mac
  • Bring the estate tax down to a non-confiscatory level
  • Make Social Security needs-based and potentially cut the payroll tax
  • Promote skills training and certification throughout a worker’s lifetime as part of the social security and/or unemployment insurance program
  • Have a health system based on either consumer-purchased insurance or government-provided insurance and remove that burden from employers

So I’m basically saying we should have a progressive, more globalist version of Ron Paul’s program of sound money, less debt, and low taxes.

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