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Are NUTs getting caught in a spin cycle?
by Dean Hulse
(Wednesday, Sept. 10, 2003 -- CropChoice guest commentary) -- A recent article appearing on the CropChoice Web site ("Panel: Supply management is the answer" http://www.cropchoice.com/leadstry.asp?recid=1918 ) questioned why if supply management works so well for U.S. monetary policy it couldn’t also be the solution for our agricultural policy. To believers in an activist government, such as me, that question and its implied answer seem perfectly logical.
The free traders have another answer—their pat answer: The market, with its inherent rationality, can manage the supply and demand scenario for commodities much better than bureaucrats can. But within that confident response hides an insecurity that only hypocrisy can produce, and I believe another question can reveal it: If an unfettered market truly is rational, why do we need a monetary policy?
The answer, which history provides, belies much free-market rhetoric. The Federal Reserve System was created in 1913 due to concerns about rising bank failures and financial instability. So, the "Fed" became the nation’s central bank—as in centralized planning—a fact that non-interventionists, Ronald Reagan and his ilk included, conveniently have chosen to ignore.
Of course, Ronald Reagan was also the most recent non-interventionist champion of supply-side economics (or "voodoo" economics as President Bush, the elder, once chided). Definitely not to be confused with any supply-management concept, the theory behind supply-side economics is all about tax rates. In writing for "The Concise Encyclopedia of Economics" (published by the Library of Economics and Liberty), author James D. Gwartney says the greatest lesson to come from supply-side economics is that taxpayers at the highest income levels indeed do respond to changes in tax rates. In other words, Gwartney argues that people in higher tax brackets won’t work as hard and earn as much, or invest as much, when they believe their taxes are too high. (Wouldn’t it be pretty to have the luxury of that option?) The rich will, however, divert their energies into avoiding taxes. According to Gwartney, "These reductions in productive effort shrink the effective supply of resources and thereby retard output."
Gwartney chronicles what he calls the "great tax debate of 1975 to 1986" and points to 1987 as the year when the Congressional Budget Office reversed its position on supply-side effects, and in doing so, left Keynesian economic theory, which embraces the role of an activist government fed by higher tax rates, in the dust. Not surprisingly, Gwartney also offers his economist’s rear-view-mirror look at other points in U.S. history when supply-side-style tax cuts occurred—namely, from 1921 to 1926, when the top marginal tax rate dropped from 73 percent to 25 percent, and from 1963 to 1965, when the top marginal rate fell from 91 percent to 70 percent. (This history, coupled with fact that voodoo can involve ancestor worship, puts a sharper edge on Bush, the elder’s, criticism.)
Now, I’m neither an economist nor an historian, but I do know what followed the 1920s and the 1960s—respectively, a decade of debilitating deflation and inflexible inflation. And I am intrigued by the fact that highest marginal tax rate went from 25 percent in 1926 to 91 percent in 1963. What produced this escalation? Certainly not prudent market forces. No. My money is on human behavior and the workings of our democracy—that is, egalitarianism played out by politics—people—presiding over ethereal economics.
Well, the "d word" is once again finding its way into discussions concerning the current healthfulness of the U.S. economy. And so, it seems the economy could be embarking on yet another tumultuous business cycle, to include, no doubt, another debate about how to respond to the latest upheaval. The economic situation we’re finding ourselves in begs another question: Which strategy should we use? That of the interventionists (Keynesians)? Or that of the purportedly free-trading non-interventionist, ultraconservative totalitarians (NUTs)?
It is under the strategy of the latter, the NUTs, where unrestrained free trade ultimately produces monopolistic power. One need look no further than the U.S. beef-packing industry, where four companies presently control more than 80 percent of the market, to grasp this fact. And so, the realities that accompany the monopolistic power of free-market capitalism become—presto-change-o!—the centralized planning and autocratic rule most often associated with communism.
As our conversation regarding intervention advances, I would ask that the NUTs refrain from using the term "free market" unless they’re willing to downsize government to the extent that the members of Federal Reserve Board, including the Fed head, presently Mr. Greenspan, are looking elsewhere for work. Short of that move, perhaps the NUTs would at least acknowledge more openly and more often that theirs is an economic system whose unpinning relies on another type of human behavior: greed.
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