The One-Page Guide

It is not necessary to sacrifice. It is not necessary to raise taxes. It is not necessary to cut federal spending. It is only necessary to change the policies that create imbalances in our monetary system.

Economics can be simplified. Government has two tools to make an economy work: monetary policy, and fiscal policy. But our national policy decisions combine these policies badly. Monetary policy has been at odds with fiscal policy since the end of World War II.

The problems in our economy today are a result of our conflicting policies. In order to repair our economy, it will be necessary to make the policies cooperate. If you know how the policies work and how they conflict, then you will know what must be done.

Fiscal policy is often called "tax and spend" policy. We think of it as something that the government wants more of, while we want less. But there is more to it than that. Taxes are used in many ways to encourage economic growth. Tax policy encourages business spending in order to boost economic activity and boost incomes. Fiscal policy is a highly effective way to stimulate the economy.

Monetary policy takes money out of circulation in an attempt to reduce inflation. While our economy has grown over the last half century, the money supply has dwindled from 50 cents to 15 cents per dollar's worth of output. That decrease is the result of the monetary policy actions against inflation. We have created a nation of customers without money.

On the one hand, monetary policy takes money out of circulation in order to limit spending. On the other hand, tax policy does everything possible to make our spending grow. As a direct result of these policies, we have less money but our spending has increased anyway. We have made up the difference by increasing our use of credit. And that has produced a tremendous accumulation of debt.

American economic policies have become a debt machine that generates debt at an ever-accelerating rate. As a result of conflicting economic policies pursued rigorously and vigorously for half a century, credit use in our economy is extraordinarily high. But the use of credit is not less inflationary than the use of money. So the Federal Reserve has driven down the quantity of money to a very low level, with little success in the battle against inflation.

American economic policy has created an imbalance between money and credit use. We have become "cashless." It has become harder and harder for us to afford our debt; interest rates are increasingly unstable; inflation does not respond to normal controls; business profits are low; and everyone, even government, has become strapped for cash.

Our policies undermine each other. To repair our economy, tax policy must fight debt accumulation and monetary policy must ease. Inflation will then be contained by the payments we make against our debt. Debt will be reduced by the new anti-inflation policy. Our policies will begin to work together. Only then will our economy recover.

(c) 1993-95 by Arthur Shipman