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How to Stop Inflation—a Winning Republican Program

AP Photo/Andrew Harnik

Last August I wrote that inflation can crush the Democrats in 2022. After the Republican triumph in Virginia earlier this month, there’s no doubt about it. The 2022 and 2024 elections are the Republicans’ to lose.

Republicans need a clear program to eliminate inflation. Complaining about it won’t help (anyone else old enough to remember Gerry Ford’s “Whip Inflation Now” campaign, or Jimmy Carter’s Moral Equivalent of War, or MEOW?). Inflation is too much money chasing too few goods and services. The Reagan approach was less money (monetary tightening) and more product (tax cuts as an incentive to economic activity). That was designed by the late Nobel Laureate Robert Mundell, the grandfather of supply-side economics.

Establishment Republicans haven’t learned anything in forty years. The Kemp-Roth tax cuts worked wonders because the top federal marginal tax rate stood at 70% when Reagan took office. Now it’s 37%, and cutting from 37% won’t have the same effect. Paul Ryan’s 2017 tax bill cut the headline corporate tax rate but reduced investment incentives, so U.S. corporations spent more money in 2018 buying back their own stock than they did on capital investment. That’s one reason that U.S. supply chains are so creaky today. Trump had the right intentions, but the details fell to Ryan and the tech lobby.

Another part of Reagan’s success was the explosion of digital-age technology, which created new businesses and reduced the cost of computation drastically. I’ve discussed this in a number of lengthier pieces, including this one for American Affairs. That’s because the Defense Department was a driver of innovation rather than a porkbarrel for established defense contractors.

Here’s a six-point program to restore growth without inflation.

  • Drill, drill, drill – revive U.S. oil and gas production and bring down energy prices. For the long term, build nuclear power plants.
  • Restore depreciation allowances to encourage capital investment in manufacturing industries, mining and construction. Fund the depreciation allowances by eliminating tax loopholes for Big Tech (for example, assigning all the income from patents to a barely-taxed Irish subsidiary). Tell Big Tech that they will pay up in taxes unless they shift to manufacturing.

Robert Atkinson of the Information Technology and Innovation Foundation has a workable plan:

Congress should enact an American Innovation and Competitiveness Tax Credit for expenditures made in the United States on R&D, machinery and equipment (including software), and workforce training…. One consideration might be that the effective U.S. tax subsidy for R&D is just 42% of the median of nations with an R&D tax subsidy…it seems reasonable to set the rate of this new credit at 30% (of expenditures in excess of 50% in the base period).

  • Give Americans an incentive to rejoin the workforce. Only 62% of the US adult population is working or looking for work, compared to 67% in 2000. That’s 8 million Americans who could be working, but aren’t. For example:
    • Eliminate the extra unemployment benefits provided during the COVID-19 emergency.
    • Index personal income taxes. Even if pay keeps pace with inflation, it pushes workers into higher tax brackets and reduces their after-tax income.
    • Get more older workers into the workforce by making Social Security payments tax-deductible.
    • Create a public-private partnership for apprenticeship programs to train workers for high-paid skilled jobs.
  • Start a crash public-private partnership to automate U.S. ports. Long Beach, Calf., is #333 on the World Bank’s port efficiency ranking. 5G technology can revolutionize port management. Huawei has already done this in China – Ericsson and Nokia can do it just as well in the United States.
  • Stop “quantitative easing” (money printing by the Federal Reserve) immediately. The U.S. doesn’t need more money. It needs more goods and services.
  • Shift the defense budget away from obsolete and expensive weapons systems and restore Reagan-era funding levels for development of new weapons, including ballistic missile defense, AI applications, quantum computing, and other frontier technologies that will have civilian productivity spinoffs. The federal development budget has shrunk from 0.8% of GDP in 1984, the peak of the Reagan defense buildup, to just 0.3% today. That’s a $130 billion shortfall.

There’s a lot to say about the details. For example, the Northern European apprenticeship system is a good model to emulate. German auto workers make twice as much as U.S. auto workers. A lot of young Americans who are shoved through the university system come out with lots of debt and not much in the way of marketable skills.

But let’s keep it simple for the time being. More capital and more labor, less money printing. Republicans need to give the voters a clear message that they know how to fix the problem.