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Protect the Dollar; Go for Growth

Two big economic stories today.

The first is about the demise of the dollar. According to London’s Independent, the Arab oil producers in the Gulf are planning with China, Russia, Japan, and France to end dollar transactions for oil and move instead to a basket of currencies that might include the Japanese yen, the Chinese yuan, and the euro, along with gold and some kind of regional Gulf state currency.

The other big story is about a possible new stimulus package from Team Obama, which is panicking over the lousy jobs and unemployment numbers from last Friday.

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As far as the currency story goes, I say where there’s smoke there’s fire. The dollar-demise story has been around for a while, and it keeps coming back. And it’s now clear that China and others have lost confidence in the greenback and want to end the dollar reserve-currency system. For the U.S., this is mostly a self-inflicted wound. And the Treasury and the Fed are in denial about this.

The gold price, by the way, has jumped $22 to $1,045. The dollar index has fallen again. Of course, the U.S. is creating too many dollars through the Fed, and fiscal disarray continues to threaten more of the same.

So I have a thought, at least for the short run: The Fed should follow Australia, the first G-20 country to raise their target interest rate. The Aussies raised their rate a quarter point to 3.25 percent. Right now the U.S. Fed should raise its target rate by 25 basis points. The fed funds target is currently 15 basis points, so this would make it 40 basis points. It would be a dollar-protection signal; a price stability signal. At least, it would be a beginning. Next, the Treasury should buy some dollars in the open market to back up the Fed.

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As for the second stimulus package, here’s my plan: Go for growth. Reduce tax rates to provide growth incentives, something Team Obama has avoided like the plague. Cut the top corporate tax rate from 35 to 25 percent, and accompany that with a small-business tax cut from 35 to 25 percent. And leave the Bush tax cuts alone. Don’t let them expire in 2011. That’s cap-gains, dividends, and the top personal rate.

Yes, this is a supply-side solution. Reducing tax rates will spur growth incentives. Forget about Keynesian spending multipliers, which Harvard’s Robert Barrow writes are less than one. Instead, borrow from George W. Bush, Bill Clinton, Ronald Reagan, and John F. Kennedy. (And Calvin Coolidge and Andrew Mellon, too.) Forget about Keynesian spending. Forget about class warfare. Forget about income redistribution. Go for growth.

Of course, none of this is gonna happen, either on the dollar or tax rates. I am a supply-side fossil. I am a dinosaur. I am a relic of the past. But I still believe the Mundell-Laffer policy approach works: A stable King Dollar for price stability and low marginal tax rates for growth.

ECONOMY/MISC

Questions? Comments, send your emails to: lkudlow@kudlow.com

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