Friday, August 25, 2006

Soviet Style Central Planning

Unfortunately, it’s beginning to look like two of Washington’s major institutions (The Fed & the CBO) want to sabotage the American economy.

Let’s start with the Fed’s goofy sacrifice ratio, which basically refers to how much unemployment has to go up in order to bring inflation down. I call this economic garbage the "Phillips curve in drag," because over the last 25 years, unemployment and inflation have actually moved in tandem and they have both moved down.

In other words, as inflation slows, unemployment comes down because the economy is strong. (If you look at their relationship during the 1970s, you would see unemployment and inflation both moving higher.)

The fact is, strong growth coexists rather nicely with low inflation. And since inflation is too much money chasing too few goods, then if you're producing more goods that absorb the money supply, especially with low tax rates to produce more goods, then why should we fear growth?

But let's not forget that misguided bunch over at the Congressional Budget Office. These folks are telling Congress that only higher taxes in the next ten years will balance the budget. Huh?

This crowd actually believes that President Bush’s tax cuts will trigger a $1.7 trillion budget hole in the next decade. The reality is that in the last couple of years since they were implemented, there have been huge revenue gains rolling in to the Treasury from the strong economy.

As it stands, the Fed’s sacrifice ratio model is simply running amok, and so is the CBO’s absurd tax hike/deficit model. Between these two genius institutions, they could destroy the economy with their bizarre logic.

What is it that causes Washington to work overtime to stop prosperity?

I don’t get it.