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October 24, 2018

President Trump has attributed the strong economy to policies of his Administration including deregulation, gas pipeline approvals and tax cuts.

If the President knew anything about the science of economics, we might rest easy as the stock market continues to make corrections, and American voters signal disapproval of the Trump Administration by voting for Democrat House candidates.

De-regulation can spur investment and that is to President Trump’s credit. But his biggest advantage is that he followed our first Marxist-Leninist inspired President, Barack Obama, and investors have voted with their investments in an improved, lower tax, lower regulated, economy.

This not as easy as it may seem, if you consider the fate of former Kansas Governor, Sam Brownback.

Sam Brownback is a believer in Supply-side Economics which is founded on the idea that tax rates, particularly capital gains taxes, directly affect the performance of the economy. So, cut those taxes fast and wait for the economy to spur economic growth.That, unfortunately, isn’t really the point.

Yes, lowering tax rates will spur economic activity, if those cuts permit those with significant income to reinvest in businesses and take risks in financing entrepreneurs to start businesses. But this process takes time and requires a culture of private enterprise, savings and investing.

In 2012, Gov. Brownback thought he could jump start the economy of Kansas quickly and ended up with significant deficits. Five years later, Kansas’ budget deficit of $900 billion and the GOP controlled state legislature overrode Brownback’s veto of a measure that would raise taxes.

President Trump’s jaw-boning of the Federal Reserve not to increase interest rates is another example. After many years of historically low interest rates, the Federal Reserve has taken steps to raise rates.

Former IMF economist, Warrn Coats, writes on Facebook today that “No one knows the future for sure. But the strong consensus is that interest rates, which are well below historical norms, are below the equilibrium rate (the rate at which rates neither push or restrain the economy). In that case the excess demand for labor will push up wages (some of which is OK) which will push up prices, which will pull up wages, and on and on. Stock market seems to be correcting its over valuation but below equilibrium interest rates will inflate asset prices and bubbles. We will be back in the late 1970s).”

The Federal Reserve can go too far as it did under Fed Chairman Paul Volkcker in 1982 when, in effect, the Fed crippled the economy by overdoing its attempt to break the back of inflation created during the Carter years. Inflation had peaked at 14.8 percent by March 1980 and by raising federal fund rates as high as 20%, inflation was reduced below 3%. But, in the 1982 congressional elections, the GOP lost 26 seats. The GOP majority at 54 seats in the U.S. Senate held firm.

The 26 seats won by Democrats in 1982, if repeated in 2016, would give control of the House to the Democrats.

That would certainly be bad for President Trump, but his commitment not to touch entitlements, and growing deficits reminiscent of President George W. Bush, will leave the next president with an economy much like the one Ronald Reagan inherited from Jimmy Carter.

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