September 2023
“The absence of a recession is not tantamount to economic growth.” John F. Kennedy
The 2024 presidential election campaigns are off and running. With the exception of RFK Jr., who is gunning for the Democratic ticket, the rest are vying for the Republican nomination. While campaign rhetoric and real-world policies rarely meet, it’s interesting to compare and contrast ideas as to how best to boost the economy and, consequently, American prosperity.
Before determining the merit of any proposed policy (fiscal, monetary, or social) it’s important to understand a couple of things, the first being the correlation between economic growth and prosperity. GDP per capita, which not coincidentally is also the average income per person, can be calculated by dividing GDP, currently $26.53 trillion, by the population, 335 million, which equates to ~$79,000 per person. If the goal is to increase American prosperity, then the logical objective is to increase economic activity or GDP.
The second thing to understand is where economic growth/wealth creation come from. To put it in a single word; innovation. Technology, improving processes, and automation lead to increased output at a lower cost. Rising productivity is 100% correlated with rising living standards.
Now that we know what drives wealth creation and how living standards are raised, there are essentially two schools of thought as to how to accomplish this; the first is demand-side economics, a Keynesian economic theory which purports that the use of government spending and monetary stimulus increases demand for goods and services, and boosts economic activity. A recent example being Uncle Sam’s COVID stimulus scheme (American Rescue Plan), which included direct payments to individuals and businesses, as well as payments to states and government agencies, not to mention massive money printing by the Federal Reserve. What was the result? Since 2020 the federal deficit has ballooned by $9 trillion, or 34%, and the M2 measure of money supply increased by 40% in less than two years. What was the result?
- Real wages are lower today than prior to COVID
- The stock market remains 13% below its 2021 high
- US household wealth is lower today than prior to COVID
- Inflation hit a 40-year high of 1%, and core inflation is still 3.3%, or 165% above the Fed’s target
- To combat inflation the Fed has raised rates eleven times since March 2022, for a total of 4.75%, with two additional hikes expected. This rapid spike in interest rates triggered the second and third largest bank failures in US history, and caused severe stress in the banking industry and credit markets
- The total employment gap is 2 million workers, or 1.3% below the pre-COVID level
By contrast, supply side proponents contend that pro-growth economic policies, such as limited regulation and a reduction in tax burden for individuals and businesses, results in greater savings and investment in private enterprise, as opposed to funding government programs and agencies. Private sector expansion leads to an increased supply of goods and services, improvements in technology and innovation, and reduced costs.
Ronald Reagan is probably the most recognized champion of supply-side policies, however, he admittedly borrowed from a predecessor’s playbook; JFK. To combat a sluggish economy and high unemployment, Kennedy turned his back on failed post-war Keynesian policies and, instead, embarked on a bold domestic program of tax cuts (personal and corporate) and promoted a business-friendly environment. While Kennedy didn’t live to see the fruits of his labor, in the four years following JFK’s plan, economic growth increased by 74% over the previous seven years. At the same time, unemployment fell 28%, from an average of 5.8% to 4.2%
Reagan enjoyed similar success, but to a lesser degree. To address high inflation and low economic growth (stagflation) that started under Nixon and increased under Carter, Reagan’s Fed raised interest rates to a record 22.36%, which, not surprisingly drove the country into a severe recession. However, Fed chair Paul Volker’s monetary chemotherapy rid the nation of lingering double-digit inflation, which allowed Reagan’s/Kennedy’s supply-side policies to boost economic growth by 62% between 1983–1989.
Demand-side spending policies don’t create wealth. Like the American Rescue Plan, Cash for Clunkers, and the Bush stimulus checks, they instead make us feel good momentarily, but always result in increased debt with no corresponding increase in output/long-term growth. Put another way, we live like kings today, and our children and grandchildren get to write the check. Demand-side spending programs are the fiscal equivalent of dine-and-dash.
Good policies are neither Republican nor Democrat; they are simply good policies. Conversely, the same holds true for bad policies. Bold leaders, like JFK, understood this. Bucking party counsel and putting his political career at risk, he chose to embrace a program that dramatically increased the prosperity of the nation. Knowing a rising tide lifts all boats, he pursued policies that did just that. Whoever wins next year would be well-served to consider dusting off JFK’s economic playbook.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com
Rising Tides
September 2023
“The absence of a recession is not tantamount to economic growth.” John F. Kennedy
The 2024 presidential election campaigns are off and running. With the exception of RFK Jr., who is gunning for the Democratic ticket, the rest are vying for the Republican nomination. While campaign rhetoric and real-world policies rarely meet, it’s interesting to compare and contrast ideas as to how best to boost the economy and, consequently, American prosperity.
Before determining the merit of any proposed policy (fiscal, monetary, or social) it’s important to understand a couple of things, the first being the correlation between economic growth and prosperity. GDP per capita, which not coincidentally is also the average income per person, can be calculated by dividing GDP, currently $26.53 trillion, by the population, 335 million, which equates to ~$79,000 per person. If the goal is to increase American prosperity, then the logical objective is to increase economic activity or GDP.
The second thing to understand is where economic growth/wealth creation come from. To put it in a single word; innovation. Technology, improving processes, and automation lead to increased output at a lower cost. Rising productivity is 100% correlated with rising living standards.
Now that we know what drives wealth creation and how living standards are raised, there are essentially two schools of thought as to how to accomplish this; the first is demand-side economics, a Keynesian economic theory which purports that the use of government spending and monetary stimulus increases demand for goods and services, and boosts economic activity. A recent example being Uncle Sam’s COVID stimulus scheme (American Rescue Plan), which included direct payments to individuals and businesses, as well as payments to states and government agencies, not to mention massive money printing by the Federal Reserve. What was the result? Since 2020 the federal deficit has ballooned by $9 trillion, or 34%, and the M2 measure of money supply increased by 40% in less than two years. What was the result?
By contrast, supply side proponents contend that pro-growth economic policies, such as limited regulation and a reduction in tax burden for individuals and businesses, results in greater savings and investment in private enterprise, as opposed to funding government programs and agencies. Private sector expansion leads to an increased supply of goods and services, improvements in technology and innovation, and reduced costs.
Ronald Reagan is probably the most recognized champion of supply-side policies, however, he admittedly borrowed from a predecessor’s playbook; JFK. To combat a sluggish economy and high unemployment, Kennedy turned his back on failed post-war Keynesian policies and, instead, embarked on a bold domestic program of tax cuts (personal and corporate) and promoted a business-friendly environment. While Kennedy didn’t live to see the fruits of his labor, in the four years following JFK’s plan, economic growth increased by 74% over the previous seven years. At the same time, unemployment fell 28%, from an average of 5.8% to 4.2%
Reagan enjoyed similar success, but to a lesser degree. To address high inflation and low economic growth (stagflation) that started under Nixon and increased under Carter, Reagan’s Fed raised interest rates to a record 22.36%, which, not surprisingly drove the country into a severe recession. However, Fed chair Paul Volker’s monetary chemotherapy rid the nation of lingering double-digit inflation, which allowed Reagan’s/Kennedy’s supply-side policies to boost economic growth by 62% between 1983–1989.
Demand-side spending policies don’t create wealth. Like the American Rescue Plan, Cash for Clunkers, and the Bush stimulus checks, they instead make us feel good momentarily, but always result in increased debt with no corresponding increase in output/long-term growth. Put another way, we live like kings today, and our children and grandchildren get to write the check. Demand-side spending programs are the fiscal equivalent of dine-and-dash.
Good policies are neither Republican nor Democrat; they are simply good policies. Conversely, the same holds true for bad policies. Bold leaders, like JFK, understood this. Bucking party counsel and putting his political career at risk, he chose to embrace a program that dramatically increased the prosperity of the nation. Knowing a rising tide lifts all boats, he pursued policies that did just that. Whoever wins next year would be well-served to consider dusting off JFK’s economic playbook.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com