Arthur Laffer says tax cuts can move America forward

Since Paul Volcker became U.S. Federal Reserve Board Chairman, and continuing under Alan Greenspan, the Fed has focused on maintaining price stability, says economist Arthur B. Laffer. However, they got off track out of concern for the threatened crash of computer systems and ensuing panic when the Year 2000 rolled around.

In anticipation of a Y2K disaster, the Federal Reserve increased the supply of money too rapidly, says Laffer, and that expansion "became the problem itself."

This caused long-term bond yields to rise in anticipation of an extended period of inflation.

Ever-rising interest rates induced people to accelerate expenditures – in effect, borrowing from the future.

Thus Gross Domestic Product grew at over 6 percent in the four quarters ending June 2000, and the Nasdaq and other measures of asset values soared.

Then, in the first half of 2000, the Fed "withdrew the excess base" and "moved right back onto the price stability track."

Now, by cutting interest rates, they are showing their willingness to help the economy during the current downturn.

But bond yields are still falling and people are deferring expenditures.

GDP growth is now way below its long-run sustainable rate and will stay there quite a while.

With unemployment low and productivity high, the U.S. faces supply constraints, says Laffer. To boost the long-term growth rate – without inflation – requires a change in fiscal policy. Thus the time is ripe for tax cuts.

Source: Arthur B. Laffer (Laffer Associates), Message to Bush: Cut Taxes Soon or Lose in 2004, Wall Street Journal, January 8, 2001.

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