Thursday, November 10, 2011

How to Fix the Economy

The brilliant presidency of Gerald R. Ford is instructive: we can learn much by studying how one of America's best leaders did things. When confronted by economic problems in the form of inflation, Ford saw that the best course of action was for the government to do less: economies can and do heal themselves, as long as they are not hindered by regulations and other types of interventions. Historian Yanek Mieczkowski recounts that in his

anti-inflation program, Ford unveiled on of his little-known but lasting legacies in government retrenchment: deregulation. At the Conference on Inflation, some economists had urged the president to reduce onerous regulations to control inflation, so early in his administration Ford set out on this mission.

Like every president, he needed cooperation from Congress to enact some of his measures. This proved possible, because leaders from both parties

conceded that Ford was on to something. They worried that some regulatory agencies acted favorably toward industries - not consumers - and realized that Ford capitalized on a perception that developed after the Great Society and Watergate, that government tends to foul things up.

The Ford administration reviewed various federal agencies, and various industries, and drew up plans to phase in deregulation in industries from trucking to airlines:

Ford's tax force developed ambitious plans for deregulation, covering almost every conceivable industry: chemicals, automobiles, food processing, communication, finance, and more. Many of his plans were implemented after he left office.

During Ford's presidency in the 1970's, but also for more than a decade after it, both the Congress and later presidents

showed the bipartisan support for his ideas: the airlines were deregulated in 1978; trucking in 1980; cable television in 1996. This was one of the unsung successes of the Ford presidency; he envisioned an economic environment with more freedom and laid the groundwork for later deregulation.

In his state of the union message, he linked deregulation to lower taxes: taxes are, after all, a form of regulation, even if they are primarily merely a form of confiscation. He explained that

the way to a healthy, non-inflationary economy has become increasingly apparent. The government must stop borrowing so much of our money. More money must remain in private hands where it will do the most good. To hold down the cost of living we must hold down the cost of government.

To put this theory into action,

a tax cut emerged as the best policy alternative. It would avoid government pump priming, give consumers more money to spend, and provide a quicker jolt to the economy than government spending. Philosophically, a tax cut was compatible with Ford's belief in returning money to the people. He was also concerned with "tax drag." Inflation not only took money from Americans through higher prices, but also acted as a tax increase. Price rises outstripped the pace of salary and wage increases, so that while real income dropped, inflation nonetheless pushed wage earners into higher tax brackets, forcing them to pay a double penalty of higher prices and higher taxes.

Although it is tempting to give all the credit to Ford (and the blame to both Nixon and Carter, who dabbled in regulation and intervention), it must be remembered that Congress ultimately holds the purse strings. Deregulation and tax cuts need both the executive and legislative branches to succeed.

By reducing regulations - keeping the government from meddling with the economy's natural processes to heal itself and return to equilibrium - and lowering taxes, Ford removed the obstacles to prosperity, and laid the foundation in the 1970's that would be the basis for the strong and healthy economy of the 1980's. Ford's energizing of the economy would be temporarily dampened by Jimmy Carter, but like a healthy body returning itself to homeostasis, prosperity emerged after Carter left office.