classical economics
for analysis,  forecasting
and policy design

Trumpism Is Classical Economics

TRUMPISM IS
CLASSICAL ECONOMICS!
What Policies Help Firms Succeed?


By Wayne Jett © August 24, 2019

     Classical economics is enjoying a rebirth across America, including (of all places) in federal policy, as President Donald Trump’s campaign to restore employment and prosperity proceeds apace. The previous president mockingly had said a “magic wand” would be needed to bring back manufacturing jobs lost to other parts of the globe.

     A magic wand promptly appeared with the new president in the form of classical economic policy, which had guided the golden age of middle class growth in the 18th, 19th and early 20th Centuries. With a “stable genius” guided by classical economic theory now leading America, economic sensibility is no longer an oxymoron.

Classical Economic Theory

     In its long, successful hey-day, classical economic theory was commonly called “the theory of the firm” because the focus of its analysis is detecting public policies which improve, or which hurt, prospects for success of private business firms. Then helpful policies are promoted and hurtful policies are removed, always taking into account the public interest. Such public interests include, of course, better employment opportunities, increased general prosperity and healthy environmental conditions.

A.    Classical Monetary Theory

1.    Stable Value

     The primary principle of classical monetary policy is this: the value of the monetary unit should remain stable over time. Neither inflation (losing value) nor deflation (gaining value) in the monetary unit is desirable or permissible, because each has detrimental effects on market conditions and hinders business prosperity over time.

     Inflation requires constant repricing of goods and services, reduces the value of savings, and eventually leads to stagnation due to inadequate purchasing power. Deflation requires reductions in prices and wages, eventually causing bankruptcy of firms selling at prices below costs of production. Both inflation and deflation are purely matters of monetary policy – not fiscal (taxing and spending) policy.

2.    General Prosperity Requires Good Money

      Successful monetary policy is essential to achieve general prosperity in the economy. Workers and producers must be able to rely upon the quality of payment received in exchange for their services and products. This applies both domestically and internationally.

     Confidence in the stable value of the currency will exist in the payee(s) of the immediate transaction only to the extent the same level of confidence exists in the relevant markets at large. So business prosperity depends greatly upon the quality of the medium of payment, i.e., the quality of money in terms of its stability in value. Ideally, the money should neither gain nor lose value over time.

3.    Money Value Measured By Gold

     How is stable value in money best achieved? Classical monetary theory concluded long ago that the superior means of measuring money value is by a stated weight of gold with stated purity. Gold is the substance viewed as most reliably stable over time in weight, purity and value in society. Thus, gold is the most trusted measuring stick of the value of money in the 21st Century, as it has been in centuries past through recorded history.

     This does not mean necessarily that classical monetary theory requires gold itself to be passed hand-to-hand in each and every transaction. A gold-based monetary system may use paper certificates which guarantee prompt exchange for gold of stated weight and quality to the bearer upon demand.

     But the system for exchanging paper certificates for gold, and vice versa, must be simple to use and must perform reliably so as to be trusted widely by the public. A monetary system which falls short of this standard will fail, as the Federal Reserve Note and other central bank currencies around the world are failing presently.

B.    Classical Fiscal Theory


     Fiscal theory and policy deal with taxing, spending and regulatory actions by government as they interface with the private economy. These government activities substantially affect prosperity of people. Accordingly, in past centuries they have been the subject of considerable attention by classical economists seeking to determine what government actions are beneficial and which are detrimental.

1.    Say’s Law

      A basic principle of classical fiscal theory, sometimes called Say’s Law, posits that a person must first produce in order to consume. In more basic terms, one must first get something to eat before one can eat it. 

     After recognizing this elemental challenge faced by every person, classical economists have presented reasoned principles that governments should acknowledge and honor so as to minimize placing unwise burdens on any person seeking to provide for self or family.

2.    Rule of Diminishing Returns

      Another such principle is “the rule of diminishing returns” as it applies to tax rates, which is now often called the Laffer Curve. This rule notes that any tax placed by government on its people raises zero dollars at two specific rates of taxation. One of these tax rates is zero and the second tax rate is 100% of the value of the taxed product or activity.

      This observation leads to a very important secondary conclusion. The amount of revenues collected by any such tax rises from zero to a maximum and then recedes again to zero. So the point of maximum revenues is also the point of diminishing returns.

      Thus, every tax levied by government has two potential tax rates which will produce the same total tax revenues. The lower tax rate will most certainly be better for the individual or business being taxed, and thus will allow greater individual prosperity. Therefore, the government ought to be certain that the tax rate adopted is the lower of the two tax rates that will produce the level of revenues necessary to serve the public interest.

3.    Maximizing Employment

      Are there other reasons for government to be certain to use the lowest possible tax rate rather than the highest? Yes. An important measure of prosperity in the economy is the percentage of total workers actually employed. So classical economic theory considers that, if the tax rate is 100% of employment income, employment is certain to be zero. Likewise, employment is likely to be closest to 100% when the tax rate on wages is zero. Thus, to achieve the highest possible employment level, tax rates on wages ought to be as low as possible.

4.    Economic Growth Rate

      Now consider the effects of the tax rate scenario on economic growth of the nation. Again, economic growth will be at or near its maximum rate when the tax rate on its production is at the lowest rate consistent with an efficiently operating society. But as the tax rate rises to 100%, the rate of economic growth falls first to zero, then plunges into negative growth (contraction). Obviously, high tax rates (with plunging employment) are not the pathway to economic expansion.

5.    Tax Financial Transactions, Not Work or Production

      On these principles, classical economic theory counsels the lowest tax rates consistent with efficient, well-run government. Moreover, classical theory advises against taxes on earned income (hallmark of the middle class) at all!
Government operations would be better supported without the present severe drag on economic production by elimination of federal and state taxes on earned income, and by replacement of such revenue sources with a low-percentage tax rate on financial transactions (including foreign exchange and derivatives).

(Points 1-5 above are made in greater detail with a few graphical illustrations in Chapter One of The Fruits of Graft.)

Kingmakers Cabal Is Anti-Constitution

       The founding fathers of America and the Constitution, including the Bill of Rights as originally written before nearly complete compromise by ill-chosen Supreme Court justices, did not permit taxes on income earned by productive activity. That constitutional restriction against income taxes was inspired and motivated by principles of classical economic theory discussed above.

       In 1895, the U. S. Supreme Court ruled that a graduated tax rate on earned income was unconstitutional. The 16th Amendment to the Constitution in 1913 permitting a graduated income tax was deemed properly ratified and valid, though that issue remains the subject of debate.

      The Kingmakers Cabal seeks global rule over all humanity. To that end, the cabal’s operatives (those known as Establishment politicians) aim to subvert constitutional rights and to pull down America’s national sovereignty. They insist the long-tested and proven classical economics is antiquated and must continue giving way to Keynesian madness: presently they propose to tax highest earned incomes at a rate of 95%.

Trumpian Classical Alternatives

      Very fortunately for Americans and the world, our elected president has acted on tax rates in a manner very consistent with classical fiscal theory as described above. Federal deficit spending has remained very high, but under crisis conditions requiring military readiness to prevent challenges to the survival of constitutional government.

       On monetary policy, President Trump’s challenge of the Federal Reserve’s destructive Keynesian practices and his nomination of Dr. Judy Shelton (a solid supporter of the gold standard for management of the dollar) are clear signals of his affinity for classical economic policies. The president rejects the Keynesian madness that has obfuscated the Fed’s actions and motives since the dollar was made the international reserve currency at the end of World War II.

      The president’s actions to revise and reform U. S. trade agreements are crucially important to the objective of restoring sound money for the benefit of Americans and all those who do business with us. As described previously, before returning to the gold standard, America needs to sell products to other nations that will roughly equal the value of goods and services we buy from them. This is why the president is pushing hard on China and other trading nations to reach a reasonable balance of trade, and why political opposition in the House and Senate – even refusing to approve the completed trade agreements with Mexico and Canada – are so detrimental to American interests.

The Cabal’s Keynesian Pushback

      With all of this evidence that President Trump is the first U. S. president willing to push hard, expending real energy and creativity, to return America to sound economic principles, Establishment operatives continue deriding his capabilities and his efforts. Putting aside the hired pundits of the Times, the Post and the Journal, consider the completely misplaced disrespect of the president’s efforts shown by a long-time seller of investment newsletters (who summers in Aspen and otherwise resides in Argentina), who derides the U. S. president as an “economic idiot” and one who “knows nothing about economics.” Listen to 30:40. This is a typical offensive deflection technique to avoid thoughtful examination of President Trump’s historic reform agenda centered in classical economic theory.

Trump’s Classical Agenda

      Consider the following components of President Trump's economic agenda:

          Trump’s 2017 cuts in income tax rates on individuals and businesses to restore economic growth and to increase employment to historic highs;

            Trump’s renegotiation of trade agreements with Mexico, Canada, European Union and China with the objective of balancing the current account deficit of $850 billion annually;

           Trump’s “magic wand” restoration of manufacturing jobs growth in the American economy after decades of severe job losses; and

         Trump’s pressuring of the privately owned, secretly operated Federal Reserve to prevent actions detrimental to economic prosperity.

        Each of these points signals Trump’s recognition that the unsecured promissory notes called Federal Reserve Notes are to be replaced by sound money with stable value measured in gold. This is to be done, partly because Americans ought to have good money for their savings, and partly because other nations are no longer willing to accept the Federal Reserve Notes or U. S. Treasury bonds as payment for their goods and services. This entails ending the Federal Reserve.

Conclusion

      On an objective basis, Americans now have political leadership that is both economically literate and politically capable of overcoming the mercantilist economic hegemony imposed upon us most ruthlessly since 1900. We must be certain to take full advantage of this historic opportunity.