Animal spirits! Here’s one for Keynes who, even if he got everything else wrong, at least understood that sometimes public perception is, indeed, 80% of the game. It is also true that in the long term, the public cannot be fed constant lies forever and continue unaffected. Bad economic policy will always overcome even the best cheerleading. However, it is important to note that during WW2, Stalin was able to make communism work well enough to build innumerable T-34 tanks and Yak fighters to beat off the Nazis. For the same reasons, Roosevelt was able to produce untold quantities of war materiel because the animal spirits of our nation was increased to a fever pitch of patriotism and survival instinct as a result of the war. Could it have been sustained forever? No. It surely couldn’t in Uncle Joe’s Soviet Union where the fundamental and fatal flaws of that economic system led to an economic debacle. But, often it doesn’t have to be. Once the spark is lit, the fire rages if the economics are sound.Therefore, if we are going to fix our economy by eschewing Keynes and adopting a model that has a proven track record, like making the tax code friendlier to entrepreneurship and investing, we also need to express the optimism and faith in the philosophical principles that underlies it. We need to understand that Supply Side theory is basically an extension of the American Constitution which limits governments power and places the real power (and money) in the hands of the people. That is what created the American Dream: real people, by the millions and millions following their own particular pursuits of happiness. It surely wasn’t the failed policy of the Keynesians who gave us the New Deal, the Great Society, the inflation of the Seventies and the idiocy of Obamanomics.
In the final analysis, when it comes to economic policy and how we maximize revenues to get them more in synch with our levels of spending, any truthful examination of the facts will come to certain inescapable conclusions. The higher the GDP growth the more revenue goes into the treasury. Regardless of the tax rate, the American people will only contribute around 18% of their income to the Federal Government. To avoid paying any more money to the government than they themselves deem to be their “fair share”, they will refuse to work extra hours, they will shelter their money, they will barter and conduct transactions in cash and do whatever it takes to avoid having their pockets picked by the IRS. But whether the tax rate is 92% or 28%, the amount of revenue that goes into the treasury is still inexorably tied to the GDP rate. The more you alter the tax code to incentivize business, reward investment and allow capital to be allocated to its most productive purposes rather than the avoidance of taxes, the higher GDP growth will be. This has been proven time and time and time again. If the goal is to maximize revenue to the treasury, the answer can never be the raising of taxes.
Therefore, the only answer to increasing revenues to the treasury is to make the allocation of capital in our economy the most productive it can be. It is to nourish the hopes and dreams of entrepreneurs, inventors and risk takers to be the next Henry Ford, Steve Jobs and Thomas Edison. This means that economic policy should never be about “justice” or “fairness” or getting even with the evil rich, but solely upon what will foster the expansion of the economy. The facts are that when we encourage our people through pro-growth policies, their natural reaction is to “go for it”they will produce a wealth and abundance never before seen in human history. We the people, making our own decisions and following our own enlightened self interest are the real engines of prosperity. The sooner we all realize that, the sooner we accept the facts, the quicker we will thrive.
END BOOK 3