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AFF Sentinel V20#39-Economy’s Moving Parts Keep Moving

Lots of Economists and Political Smart People Know How to Fix Things

Steve Dittmer | AFF Sentinel

Colorado Springs, CO

Originally sent to subscribers 08/29/23

We continue to be discouraged that the Federal Reserve still does not understand that taming inflation is not about trying to choke the economy down but hoping not to kill it. The way out of inflation is with growth in the economy, incentivizing production, helping productivity, helping create jobs and products and services, which also creates more government revenue. Cutting taxes and cutting regulations is the answer to creating economic growth. The Fed still harbors Keynesian thoughts that cutting demand, killing off jobs and reducing wages is the way to reduce inflation and engineer a soft landing.

Luckily for the country, the economy has so far proven stronger than anyone expected.

We may well have a soft landing, but in spite of the Fed, not through the Fed’s work. Some economists think the economy is doing better than the Fed thinks and the indexes show, meaning that the Fed will keep rates higher longer than businesses want and the stock market thinks. We continue to have some growth, even though the housing market is strangling and the index of economic indicators has gone down for 18 straight months. By contrast, the widely watched Atlanta Fed GDPNow model is forecasting a GDP of 5.9 for the third quarter.

Everyone keyed in on Fed Chairman Jerome Powell’s speech at the economic summit at Jackson Hole. To no one’s surprise, he didn’t give a lot away but did indicate that inflation hadn’t been tamed yet and more rate increases could still be necessary.

Michael Faulkender, University of Maryland professor, former Treasury economist and chief economist at the American First Policy Institute disagrees with Powell’s theory that decreasing demand is the only cure. The reality is that it takes a coordinated effort between monetary policy, tax policy and regulatory policy to bring down inflation and heal the economy, Faulkender said.

Boosting the supply side of the equation worked for Ronald Reagan, David Asman, Fox Business host noted. Faulkender added that it worked for President Trump. They could have noted that the tax reduction portion worked for JFK and Calvin Coolidge. The regulatory state was relatively benign in those years compared to today’s leviathan.

History contradicts Powell’s position and Faulkender suggests maybe he’s taking that position knowing that’s what President Biden wants and that’s how he hopes to get reappointed.

Faulkender said the government needs to get spending under control and forge a pro-growth regulatory policy. Biden needs to get with Congress and his administration people to accomplish that. Former Fed Chairmen Alan Greenspan and Paul Volcker knew that, Faulkender said.

In the Republican presidential debate, Nikki Haley made a great point. Republicans have gone along with some of the spending excesses hurting the economy, including bringing back earmarks. Members of Congress from both sides of the aisle need to be reminded it is not their money they are spending.

One culprit in recent years is the failure to get appropriations bills out of committees and on to the floor for a vote before the end of the fiscal year. The ploy instead has been to delay and then vote on gargantuan omnibus spending bills no one had the time or inclination to read.

House Speaker Kevin McCarthy has made a concerted effort to get bills to the floor. He reiterated recently that he does not like the huge omnibus bills that recent Congresses have passed. He told Maria Bartiromo on Fox recently that he is not sure all the bills will get passed by Sept. 30. A short-term continuing resolution might be necessary to get everyone in the House together and the Senate recalcitrants to fall in line.

Another procedural misstep McCarthy wants to avoid: scheduling votes on major bills right before a holiday so members vote for anything to get out of Washington and go home.

Steve Forbes, Forbes Media publisher and astute political observer, agrees that the Fed’s policy makes a recession more likely. He also quipped that someone needs to dust off Alan Greenspan’s speeches from the ‘90s and give them to Powell.

The Fed needs to leave the economy alone at this point, Forbes said. He believes the Fed is in better shape than it thinks. Larry Kudlow agrees, since the Fed has already drained a trillion dollars from their balance sheet. The Fed needs a supply-side pro-growth policy in effect, with lower taxes and less regulation producing more goods and a steady currency.

Instead, news has come out that the Biden administration is pulling 9-10 percent out of their next auction for drilling rights in the Gulf. On top of that, they are putting restrictions on where vessels can sail, how they can sail and other obstacles, to make new or existing leases more difficult to operate. That’s a continuation of this administration’s policy of vowing to kill off oil and gas production, holding some lease auctions, but making it difficult, uneconomic and very slow to drill on the leases --  and then chiding energy companies for not drilling on the leases.

The rig count on both land and ocean leases has continued to fall in 2023. Energy companies have finished some wells already started but been chary of drilling new wells with the cost and labor issues and the long-term discouraging attitude of the federal government to end fossil fuels.

Forbes favors a Kemp-Roth style tax cut -- 30 percent across the board -- like the one Reagan made the centerpiece of his administration, rather than just extending the 2017 cuts. To accomplish that politically, the country needs a new president and a new Congress, he noted.

Next time: More comments from smart economists on our situation.

Edi. Note: the pic below looked so good, we had to keep it again, (courtesy beef Check off).


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