Most Americans like Wendy Williams, a waitress at Mom's Restaurant, seem perplexed by the present economic situation, even though the Obama administration keeps saying that the recession is all but over and the return to prosperity is near at hand. Williams is far from alone when trying to answer the question: ”If you had the power, what would you do to improve growth and prosperity in America ?” She shrugged, “I have no Idea.”
The definitive answer to this type of question was given by former presidential candidate and Forbes business magazine publisher Steve Forbes several decades ago when he told an audience in Orlando that the five keys to a sound economy are low taxes, few regulations, sound money, unhampered foreign trade and solid legal protection of property rights. These keys have been echoed by every competent economist I have ever heard.
This is nothing but the classical formula for increasing production. Without increased production of goods and services your economy cannot improve. Let us look at these five keys one at a time.
First and foremost, consider lowering marginal tax rates. This stimulates people to produce more because they can only benefit by working and producing more. Notice that when stimulus money is spread around people are motivated to gather it in but there is no motivation to work and produce more. You end up with more money chasing the same amount of goods and services. This does nothing for the economy.
By reducing regulation you make it much easier and cheaper to conduct business and start businesses. It is obvious that this has to help.
Sound money that retains its value is an absolute necessity for a sound economy. Nothing will destroy your economy faster that high inflation.
Free flowing foreign trade gives both customers and industry access to better and cheaper products. Trying to block foreign competition through tariffs and quotas leads to higher prices for both consumers and manufacturers. It is estimated that the recent steel tariffs cost the U.S. approximately 800 thousand dollars for every job saved in the steel industry. Also there was a net loss of jobs in the process.
Legal protection for your property rights is essential in order to build any type of industry. The former Soviet Union is a good example of a country with weak property rights and they suffer economically. Every business has to spend a lot of their resources protecting their property and as a consequence the economy offers few opportunities.
If you assume that these really are the keys to a sound economy, then you must be alarmed to see that our present policies are clearly taking us in the opposite direction on taxes, regulations and sound money and are probably going in the wrong direction on property rights and foreign trade.
You reach the conclusion that the present recession will not turn into a strong recovery any time soon no matter how much the leadership says it is. The stock market recovery is more of a correction for a too strong down turn than an indication of real growth. Real growth in stock values depends on real growth in earnings.
With the threats of higher taxes, more regulations and various other threats to business it is hard to envision any real healthy growth any time soon.
Business owners are hunkered down waiting to see what happens and what the new rules and conditions are going to be. Meanwhile, all we see are various threats from our leadership to do various bad things to the people who create jobs and make the country run.
No wonder the price of gold is up.