To mitigate the effects of monetary constraints, we need enhanced growth…

Political pressure is mounting on Federal Reserve Chairman Jerome Powell to curb his battle against inflation by limiting interest rate increases and resuming quantitative easing. But with inflation still going, it would be a huge mistake for Powell to succumb to this political pressure. Instead, Congress and the executive branch should do their part and implement pro-growth fiscal policy to counterbalance the Fed’s necessary monetary restraint.

The annual inflation rate as measured by the Consumer Price Index (CPI) is 8.3 percent, the highest rate since the crushing inflation of the 1970s. It is worth considering how we got here. Inflation is at a 40-year high, in part because interest rates have been kept artificially low for far too long. Loose monetary policy and easy money have created conditions for inflation – too much money chasing too few goods. Lockdowns imposed by the government in response to the Covid pandemic have also distorted the market, disrupting supply chains. At the same time, reckless fiscal policy that sent cash to consumers increased demand.

Progressives such as Elizabeth Warren have called on the Federal Reserve to limit any further rate increases, claiming that “the Federal Reserve does not control the primary drivers of higher prices, but the Fed can slow demand by firing too many people and making households poorer.” Other prominent pundits and progressives have argued that the Fed risks tipping the economy into recession if it continues with its rate increases, thus concluding that the Fed should halt any further increases despite the fact that the inflation problem is nowhere near resolved. . It would be a grave mistake for Powell to heed these calls.

President Powell was right to raise the federal funds rate, a political lever that increases the cost of borrowing and thus dampens demand and slows the growth of the money supply. It is true that this monetary restriction can lead to a recession, in part because it exposes the bad investment that has resulted from the Fed’s easy money policies. However, if we want to address inflation And the To avoid a prolonged recession, we must apply both monetary and fiscal tools to calm demand and increase supply. This guide has worked before. The Reagan administration and the Volcker Federal Reserve tamed inflation and ushered in an era of economic growth and prosperity. By increasing the cost of borrowing and thus pacifying demand, and by lowering taxes and thus easing the burden on supply, Reagan and Volcker created the conditions for economic recovery.

Inflation peaked at 14.8 percent in March 1980. By the time President Reagan took office in January 1981, Federal Reserve Chairman Paul Volcker had begun his monetary tightening, raising interest rates that peaked at 20 percent in June 1981. This “shock” Volcker, as he was known, pushed the country into two consecutive recessions, the first in 1980 and the second in a row from 1981 to 1982, and saw the unemployment rate approach 11 percent.

With political headwinds of 10.8 percent unemployment and a 1.44 percent drop in GDP, Reagan took the lead at a time of recession, high inflation, soaring unemployment, and a Fed undeterred by economic pain. He could have made Volcker a scapegoat, claiming that he raised interest rates too quickly and that he needed a more modest and gentle approach to fighting inflation — a “soft landing,” so to speak. Instead, Reagan realized that Congress and the executive branch also had a role to play in pulling the country out of recession. Pro-growth fiscal policy has complemented monetary tightening. And while interest rates were raised to curb demand, taxes were lowered to stimulate supply. By doing both, equilibrium was achieved in the economy as demand fell to meet supply and supply rose to meet demand.

Reagan implemented two major tax cuts during his two terms in office. The first is the Economic Recovery Tax Act of 1981, which lowered the highest personal income tax rate from 70 percent to 50 percent and the lowest rate from 14 percent to 11 percent, and lowered the highest capital gains tax rate from 29 percent to 20 percent. The second tax cut was the Tax Reform Act of 1986 in which federal income tax rates were lowered further, the number of tax brackets were reduced, and the top tax rate decreased from 50 percent to 28 percent.

In the end, Reagan’s fiscal policy succeeded. The inflation rate fell from 14.8% in March 1980 to 3.9% in March 1982. Unemployment fell from a peak of over 10% to 5.5% by the end of the decade. Real growth averaged 3.5% over the decade as well.

This chapter in American economic history offers useful lessons for fighting inflation today. After initially caving in to political pressure and keeping interest rates very low for a very long time, Powell is now trying to redeem himself by taking the pressure to limit future rate hikes. But to mitigate the effects of monetary tightening, avoid a protracted recession, and ultimately ignite economic prosperity, we need an executive and Congress willing to pursue pro-growth fiscal policy.

So far, the politicians in power seem completely uninterested in doing so. Indeed, President Biden regularly considers inventing new taxes to punish producers for their sins of greedily raising prices. This would be the exact opposite of what is needed: lower prices for consumers.

And the taxes already imposed by the Biden administration in the deceptively named IRA will be economically damaging in the long run. According to the Tax Foundation, “Biden’s tax plan will have a negative impact on the US economy, as it will reduce long-term GDP by 1.62 percent” and reduce “the capital stock by about 3.75 percent.” Needless to say, the IRA would have little effect on inflation, raising it slightly in the first two years of implementation with estimates from Ben Wharton’s budget model of its broader inflationary effect being “statistically indistinguishable from zero”.

With no sign that those in power will change course, let’s hope a divided Congress can impose some fiscal discipline on the executive branch. As the midterms pass and attention shifts to the 2024 presidential election, inflation and economic health will likely remain top priorities for candidates and voters. As we head into the long run of presidential campaign season, it’s worth considering that we may have Volcker right now, but we need Reagan.

Kat Dwyer

Kate Dwyer is a Young Voices contributor and co-host of the Whiskey Bench podcast. Her writing has appeared in the National Review, the Washington Examiner, and others.

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