For the last year or so, since inflation hit its highest level in forty years, Washington policymakers have been focused on slowing the economy down. The economic experts at the Federal Reserve, in the Biden administration, and the mainstream media all believe that economic growth causes inflation, and that slower growth is necessary to curb rising prices.Federal Reserve Board Chairman Powell said last summer that reducing inflation would require a “sustained period” of slower growth. Treasury Secretary Yellen said last winter that “economic growth has to slow” to being inflation under control. And just last month at Jackson Hole, Powell said he was prepared to raise rates again if the economy does not slow down. As a result, interest rates are now at a 22- year high. Household debt is at its highest level ever, credit card debt has surpassed $1 trillion, mortgage interest rates have skyrocketed, car loan defaults are up, and personal savings are falling. Over the last year and a half, real GDP growth has increased at an anemic 1.25%.The notion that increased economic growth will increase inflation is absurd, and has no historical precedent. Over the last one hundred years, we have never had a period of rising prices caused by increased economic growth. But we have had extended periods of strong growth and low inflation.In the early 1980s, with inflation raging at double-digit levels and growth stagnating, President Reagan’s economic recovery program of low tax rates and spending cuts succeeded in increasing economic growth and reducing inflation. From 1983 to 2007, real GDP increased an average of 3.4% a year, and inflation averaged less than 3% a year.The economic evidence is clear that lower tax rates increase investment, enhance productivity, and lead to higher growth and lower prices.In 2016, after ten years of sluggish economic growth, the Federal Reserve concluded that economic growth of 2.5% or more was not possible anymore, and set their long-term growth expectations at a dismal 1.8% a year.Yet economic growth increased between 2.5% and 3% in the years from 2017 to the start of the pandemic, when corporate tax cuts increased business investment, productivity, and wages. At the same time, inflation dropped to 1.7%.Higher economic growth will not result in higher prices. It never has and it never will. Rather, increasing economic growth through increased investment will increase productivity and result in the production of more goods and services and falling prices.
Slower Growth Is Not the Answer For Curbing Inflation
September 15, 2023
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