Interest rates and inflation are at a record low, yet stimulus spending has flooded the markets with currency.  The valve that turns money creation into inflation is velocity. The velocity is very low because businesses are reluctant to invest and hire in the face of radical new legislation, massive uncertainty, basically poor sentiment.

Even the extension of the Bush rates, Orwellianly called tax cuts, only extends the rates for two years- far too short a time frame to have any real positive impact on producer certainty and confidence.

If political changes improve the outlook and confidence of the producers we can expect to see more investment and spending- more velocity- and this would seem to ignite inflation.  We are to trust that the Fed can reduce the money supply to avoid such an outcome. I remain skeptical.

We can also expect to see a short term rise in unemployment as many workers who have stopped looking return to the workforce and become countable. But unless we see a repeal of the health care bill, which is unlikely for at least two years, and other serious cutbacks we will continue to see business remain reluctant to hire.

We need to improve business sentiment to stimulate hiring and investment, but if we succeed we risk igniting inflation and a Fed reduction in the money supply.  Inflation is generally considered a better alternative to deflation which could cause a serious problem for the banking system.  But inflation could increase interest rates which on our new massive debt could cause serious problems for our currency.

A combination of stimulative fiscal policy and sound monetary policy seems the only way out.  Sound money means reducing the debt and cutting government spending in a massive way.  A stimulative fiscal policy usually means low taxes and regulation but I would add that adding a sense of certainty and consistency to our business environment that has long been missing could have as stimulative an impact as tax cuts themselves.

The policy of sound money and stimulative fiscal policies has been successful for both parties: it worked for the Republicans under Coolidge and Reagan and for the Democrats under Kennedy and Clinton.  As our system has become more progressive the government has become increasingly dependent on the success of the wealthy and the business sector to support its programs. Under this highly progressive tax environment a Supply Side approach should be welcomed by either party.

More from  Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth.  For a bit about Roy’s experience see The Great Debate  Part I

Let’s take socialism to an extreme.  Let’s make sure everyone earns the same amount… that would be fair, right?  So, for everyone that makes above average, we will take the difference and give it to everyone that makes below the average.  That way, everyone makes the same.  What would happen?  Easy.  I would quit working because I know that I don’t need to work to make the average wage.  In short order, the average would drop to zero as soon as the last guy figured out he was the only one working.  Extreme, yes, but incentives work in the trivial as well as the extreme.

Even if it is “Just another tired old solution that looks good on paper”, no system yet devised by man has improved the lot of ordinary people more than the productive activities unleashed by a free enterprise system.

So, what assurances do you have that “the top 3% will be divinely led to use theirs for R&D, business improvement, hiring new workers and all those other wonderful things Adam Smith promised we would experience in capitalist economies?”  If history is any judge, the answer is pretty clear on this as well.  Since 1978, the U.S. has cut the highest marginal earned income tax rate from 50% to 35%, the highest capital gains tax rate from about 50% to 15% and the highest dividend tax rate from 70% to 15%.  During this time, income tax receipts from the top 1% of income earners rose from 1.5% of GDP to 3.3% of GDP… an increase of 120%.  A fluke?  Nope.  When Kennedy cut the highest income tax rate from 91% to 70%, income tax receipts from the top 1% of income earners rose from 1.3% of GDP to 1.9% of GDP… an increase of 46%.  What happened between Kennedy and Reagan, you say?  The answer is the four stooges, Johnson Nixon, Ford, Carter and their redistributionist, Keynesian policies during which time U.S. equity prices decreased 20% in real terms and tax receipts from the top 1% of income earners went from 1.9% of GDP to 1.5% despite a rise in the top tax rates. Just another fluke?  Nope.  When Harding and Coolidge cut tax rates in the 1920′ from 73% to 25%, tax receipts from the top 1% of income earners went from 0.6% of GDP to 1.1% of GDP… an 83% increase.  A prescient example is Roosevelt’s “Soak the Rich” tax increase in 1936, raising the top income tax rate from 63% to 79% along with a host of corporate tax increases arguably sending the slowly recovering economy into a double dip depression, with unemployment rates rising again to 20% in 1938.  What happened to the tax receipts from the top 1% after the tax increase you ask?  You got it, they decreased as a percentage of GDP, even as GDP fell.  These examples are not cherry picked. Throughout history when tax rates on the top earners were substantially raised, production (economic activity) fell.  So did tax receipts from the rich… a certainty in percentage of GDP terms and more often than not in gross terms. “The fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues while the taxpaying base was exterminated” – Bartlett.

The race in Massachusetts is stunning.  If Democrat Coakley is unable to beat Republican Brown in the bluest of blue states, then any Democrat is vulnerable. Just the fact that this race is close  should be a startling wakeup call to the Democratic party.

It appears that Brown is doing and saying all the right things and Coakley is doing just the opposite. If defeated the party will blame the candidate , and refuse to see it as a referendum on the current administration. Brown is running against Coakley on her statements, her policies, and her record. Brown is being attacked by invoking references to Bush and “tea baggers.”

Last Wednesday the odd at the trading site Intrade had the odds of a Coakley win at 85 to Brown 15, this morning it 53/47; a remarkable shift.

The Democrats have grossly misread their mandate and their hubris has dwarfed even that of the Bush administration. This mismanagement of their party’s victory should be laid squarely at the feet of their leaders, especially Pelosi and Reid. Their first constructive step to clawing their way back from the abyss should be to quickly replace both of them.  It is their hubris, partisanship and arrogance that are putting the nails in Kennedy’s coffin.

Much has been said of Obama’s intelligence. Oprah said he is brilliant. While he appears an intelligent politician and a personal class act, much more is required for the office he is seeking.

Kennedy was surrounded with some of the most intelligent people ever assembled in the White House. VP Johnson commented how each person he met was smarter than the next. Yet these advisors delivered the Bay of Pigs and the entry into Viet Nam.

Your intelligence will serve you well when you can islolate a problem and have the time to ponder the sides. But when you must decide quickly with less than all of the facts, without sleep or food for extended periods you must rely on conviction, principles and a moral center to guide you.

Reagan may have not been the most intelligent president but he had enough conviction and faith in his tax policy to stay with his program in spite of constant derision from the media and even members of his own party. (George H. Bush called it voodoo economics.) Reagan was vindicated with an economic success that lasted 25 years.

Does the candidate believe in property rights, the rights and supremacy of the individual,and the free market or does he believe in statist solutions and elitist control.

It is more important to know a candidate’s stand on basic principles than his IQ.