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Ron Paul’s De-Stimulus Plan

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Congressman Ron Paul has put forth an economic plan that calls for serious cuts in the size, budget, and power of the federal government. He has also proposed policies that would end the Fed-driven inflation responsible for the global economic meltdown. This is truly a de-stimulus plan.

Paul’s plan would immediately cut $1 trillion from the federal budget by closing down five cabinet departments, slashing regulations, and withdrawing troops from overseas. During a Paul presidency, the U.S. government would cease being the world’s policeman, and the empire would be liquidated in the interests of the both the economy and the Constitution.

Such a radical and necessary shift in foreign policy would be difficult for those Americans dependent on the war economy and accustomed to seeing their government as a colossus bestriding the world. But now is the time for Americans to face reality and admit that our country’s exalted global position has been a corrupting experience, and it is simply no longer affordable.

Such a sharp reduction in the federal budget, coupled with much tighter monetary policy would stop the flow of so-called stimulus spending from the economy. This would be the beginning of a painful readjustment period, as people necessarily reduced their consumption, and the economy liquidated years of inflation and debt-financed malinvestment. Unemployment would likely go up in the short term as zombie firms deprived of their periodic fix of easy money went bankrupt, and government payrolls were thinned.

But it would also be the beginning of genuine economic recovery, because the private sector, relieved of the burdens of a metastasized state, would begin to accumulate real capital and invest in viable enterprises. Real jobs, not government jobs, would be created, and Americans would soon find themselves earning more, because their currency, no longer devalued by the Fed’s printing presses, would actually gain purchasing power.

No doubt Keynesians would still be out there preaching the necessity of countercyclical fiscal and monetary policies and warning of the dire consequences of deflation. There would also be no shortage of hack politicians and rent-seeking special-interest groups willing to spread the Keynesian message of more government spending. And it would be naïve to expect the financial elite to sit quietly as their privileges were taken away. A few select firms on Wall Street reap enormous profits from the bond market, and under the current system they are free to engage in essentially risk-free speculation due to their “too-big-to-fail” status.

Paul has defended his de-stimulus program to inquisitors by correctly pointing out that similar “austerity measures” have been very successful in the past in spurring economic recovery and therefore should be used as roadmaps for recovery today. During a recent appearance on NBC’s Meet the Press, Paul tutored host David Gregory on “the depression of 1946.”

Now, readers can be forgiven for not being familiar with the depression of 1946, because there actually wasn’t one. But many Keynesian economists were predicting in 1945 the onset of economic depression as a consequence of peacetime demobilization. However, the exact opposite occurred, because the end of the war brought an enormous peace dividend in the form of a two-thirds reduction in government spending as well as the removal of most of the wartime economic regulations.

Jason E. Taylor and Richard K. Vedder explain in greater detail in their article “Stimulus by Spending Cuts: Lessons from 1946”:

Historically minded readers may be saying, &147;There was a Depression in 1946? I never heard about that.” You never heard of it because it never happened. However, the &147;Depression of 1946” may be one of the most widely predicted events that never happened in American history. As the war was winding down, leading Keynesian economists of the day argued, as Alvin Hansen did, that &147;the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” After all, the belief was that the only thing that finally ended the Great Depression of the 1930s was the dramatic increase in government involvement in the economy. In fact, Hansen’s advice went unheeded. Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent what the historian Jack Stokes Ballard refers to as the &147;shock of peace.” From the economy’s perspective, it was the &147;shock of de-stimulus.”

Another historical precedent Paul can point to is the depression of 1920. Very few people have heard of this “economic crisis.” This is most likely due to its short duration and the fact that Warren G. Harding, a president not held in high esteem by mainstream historians, was able to reverse it with laissez-faire policies that are anathema to Keynesian orthodoxy.

Historian Thomas E. Woods Jr. provides this synopsis of Harding’s successful de-stimulus program:

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

Paul’s de-stimulus plan has been given the cold shoulder in Washington, DC, but that’s to be expected. After all, politicians are in the business of dividing plunder, and proposing to take an axe to the federal budget is no way to win friends and influence people inside the Beltway. But most Americans are now skeptical of stimulus programs, because the plans have clearly failed to reverse the country’s economic downturn. Indeed, more people are coming to realize that the orgy in government spending since 2008 has only accelerated the decline. Moreover, there is serious concern regarding the federal government’s unprecedented budget deficits and their potential for sparking hyperinflation.

Perhaps enough voters will come to realize that Paul is the only presidential candidate proposing policies that address the country’s fundamental economic problems, and perhaps they will reward him appropriately for his insight and statesmanship.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.