- The Washington Times - Thursday, March 29, 2001

The long Reagan expansion was a casualty of the Y2K scare. The Federal Reserve, thinking that Americans would withdraw a tremendous amount of cash to protect themselves against computer crashes, added excess liquidity during 1999. But Americans did not hoard cash. Consequently, the liquidity found its way into stock prices.

With the smooth transition to the year 2000, the Fed realized that it had made a policy mistake by pumping up the monetary base to inflationary levels. Reacting to its own prior miscalculation, the Fed withdrew the excess liquidity. The result was higher interest rates and lower stock prices.

When the Fed takes money out of the economy, it depresses economic activity, just as adding money can put a head of steam on a boom. The price of the Fed's Y2K mistake is a slowdown and, most likely, a recession.

Ever since the Fed was created, the Fed's mistakes have been the main cause of recessions and inflations. The Fed's first mistake was a huge one — the Great Depression. In the early 1930s the Fed misinterpreted the reasons for the stock market crash and the behavior of banks.

The Fed thought that too much liquidity had driven up stock prices to unsustainable levels, and the Fed misjudged the reason banks accumulated excess reserves in the aftermath of the crash. Fearful of panics that caused runs on banks, bankers hoarded cash in order to be able to weather a run on the bank by scared depositors demanding cash. The Fed misinterpreted the excess reserves as a sign of too much liquidity in the banking system.

One Fed mistake led to another. The end result was a dramatic reduction by 33 percent in the supply of money. Purchasing power, prices and employment all collapsed.

The consequence of the Great Depression was the New Deal — essentially the abandonment of the American constitutional system of limited government and accountable law. The depression was taken as evidence that the “old order” had failed and that a new activist and paternalistic central government had to take its place. The entire transformation of the U.S. constitutional order is due to the Federal Reserve's monetary mistake.

One important reason that liberal Democrats and “moderate” Republicans oppose tax cuts is that tax cuts are seen as a move away from activist government back toward what liberals believe is the depression-prone “old order.” Progressives see tax cuts as atavistic policy, a throwback to the past.

The benefit to the economy of a tax rate reduction means little to people who believe that we need more government, not less. This is the reason liberals remain unmoved by arguments showing the efficacy of tax cuts. A tax cut may get the economy going, but it is the wrong kind of economy.

For liberals, the right kind of economy is one in which government has the money to attend to people's old age retirement, health care, education, child care and welfare, and to regulate the work place, the medicines people take, the design and manufacture of the products they consume and, increasingly, their use of language.

The argument for tax cuts is an argument for more individual responsibility. A tax cut implies that the money people earn belongs to them, not to some collective need. A tax cut is an argument for freedom.

Many Republicans are uncomfortable making such an argument, because the New Deal redefined freedom to mean freedom from want. The old freedom meant that a person was free to succeed or fail, and if the latter, to be in want.

The New Deal has slowly altered the American character, accustoming people to trade off freedom for security, much like free men after the fall of Rome became serfs in exchange for military protection. Most Americans now take for granted that someone else is supposed to look after their retirement and pay their doctor and medical prescriptions. Millions of Americans rely on someone else to pay their rent and grocery bills.

A tax cut would boost economic growth. More importantly, a tax cut would boost the inclination and ability of Americans to stand on their own feet — the only feet on which a free people should stand.

Dr. Roberts' latest book, “The Tyranny of Good Intentions,” has just been released by Prima Publishers.



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