Inflation and Higher Interest Rates Not Caused by Government Red Ink

December 5, 2002

Those who want the U.S. to slash its budget deficit often say government red ink causes both inflation and higher interest rates. Neither is true, observers point out.

Looking back on former President Ronald Reagan's tax cuts, many economists -- including some Nobel winners -- argued that tax cuts would shrink tax revenues, explode the deficit and send inflation and interest rates soaring. So what happened?

  • Revenues grew by over 50 percent during the decade, in spite of an increasing deficit caused largely by a defense buildup and Congress' inability to control spending.
  • From 1981, the year Reagan's tax cuts were enacted, to 1989, inflation dropped from 8.9 percent to 4.6 percent.
  • Interest rates on benchmark 30-year Treasuries plunged from 13.45 percent to 8.45 percent.
  • The economy added 17 million jobs and $1.6 trillion in real economic output.

Reagan understood what the economists did not, namely, that growth wasn't a function of government. Whatever role government might play in stabilizing the economy's ups and downs, it takes business and entrepreneurial vision to drive growth. Now, with President Bush pushing more tax cuts, we're hearing the same arguments.

Source: Editorial, "Deficit Deceit," Investor's Business Dailey, December 5, 2002.

 

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