Corrections, Please! M. Skousen

The real culprits, says The New York Times ("Why America Won't Boom," June 12, 1994), are the bondholders of America. "The American economy is governed by the bond market," Louis Uchitelle writes in The Times, and "the confederation [of bondholders] has ruled in recent months that the economy should lose strength, not gain it. " Another recession may not be good for the country, but it's great for bondhold ers as interest rates decline and bond prices skyrocket. Mark Skousen is editor of Forecasts & Strate gies, one of the nation's largest financial news letters, and an economist at Rollins College, Winter Park, Florida32789. His book, Dissent on Keynes, is available from Laissez Faire Books, (800) 326-0996. by Mark Skousen No wonder Wall Street suffers from a tarnished public relations image. Surprisingly Good News Fortunately, there is good news for both Wall Street and Main Street. Believe it or not, the United States can enjoy a booming economy without interest rates rising. In fact, interest rates can decline under the right circumstances, even as the demand of business expansion increases.

Latin America and many other emerging market economies have proven that eco nomic growth and lower interest rates can go hand in hand. In Mexico, Chile, India, and many other rapidly developing nations, interest rates have declined in the face of strong economic expansion and a rising standard of living. How? While pursuing anti-inflation policies, their governments have cut tax rates, privatized government services, reduced tariffs, welcomed foreign capital, and deregulated business. In addi tion, some countries (such as Mexico and Argentina) have eliminated capital gains taxes altogether, thus encouraging saving and investing. The Trouble with Easy Money Unfortunately, the United States and other industrial countries are not following these sound principles of free-market capi talism. Instead, they are relyingprimarily on "easy money" policies to stimulate eco637 638 THE FREEMAN • NOVEMBER 1994 nomic growth. If a strong economic recov ery is spurred by easy-moneyllow-interest rate policies, the fear of inflation is very real when the economy heats up. Hence, interest rates tend to rise once an inflationary boom gets started.

That is precisely what has happened in the United States during the early 1990s.To get the economy moving again, the Fed pushed short-term rates down to 3 percent, encour aging millions of savers to switch out of bank deposits and CDs and into stocks, bonds, and mutual funds. Obviously, this artificiallylow interest rate strategy could not last forever. As the Austrian economists point out, an infla tionary policy will eventually raise interest rates and cut short the recovery. A boom must lead to a bust. In the first half of 1993, interest rates started increasing in the face of rising inflationary expectations. Prosperity by Other Means The key is to spur genuine economic growth by means other than easy money and artificially low interest rates. How then? By encouraging higher rates of saving and cap ital formation. This could be accomplished very easily by reducing or eliminating taxes on businesses, savers, and investors. A sharp reduction in the capital gains tax rate and the corporate income tax rate would do wonders for economic growth without rais ing interest rates. So would exemptions on interest and dividends, or expanding tax deferred retirement programs.

As a result, the supply of saving and investment capital would expand, putting downward pressure on interest rates. Again, as the Austrian economists demonstrate, a longer-term time preference, as reflected in higher rates of saving, tends to drive interest rates lower. Then, we could put an end once and for all to this myth on Wall Street that a booming economy necessitates higher interest rates. Someday, when the United States gets its act together, we can look forward to this headline: "GDP jumps 10%. Dow skyrock ets to 30,000, surpasses Nikkei." D Essay Contest First Prize $2,000 Honorable Mentions $250 The 1995 J.E. Davis Award will be presented to a college student whose essay on the virtues of the free market is chosen by our review panel. Topic: Capitalism and The Failure of Socialism For additional information, including an entry form, call (904) 744-9986 or write to Dr. MarkJ. Perry, IWe, Jacksonville University, 2800 University Blvd. N, Jacksonville, FL 32211.

Fax: (904)744-9987 E-mail: iwc@junix.ju.edu Deadline for entries: January 31, 1995 The Institution for World Capitalism at Jacksonville (Florida) University is sponsoring this annual essay competition as part of its comprehensive education and public affairs program to advance democratic capitalism in America and around the world.