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Last March when the financial system stabilized, many praised the Federal Reserve. Bernanke & Co. undertook extraordinary measures to bring the financial system back from the brink -- by lowering interest rates, quantitative easing, or arranging shotgun marriages between JPMorgan Chase (NYSE: JPM ) and Bear Stearns (and Washington Mutual), Wells Fargo (NYSE: WFC ) and Wachovia, and Bank of America (NYSE: BAC ) and Merrill Lynch.
At the same time, Congress passed a nearly $800 billion federal stimulus package in an attempt to shock the economy back to life. A year and a half later the economic recovery is slowing and unemployment remains high. People remain dubious about whether the extraordinary measures are working, while the Fed has said it will do whatever is necessary to keep the economy from slipping further. But critics argue that the Fed has already done its job, and that it's now up to Congress, the Obama administration, and sound fiscal policies to pave a path for growth. So what should be done?
In an interview, Congressman Ron Paul (R., TX) said he thinks the current policies have failed and fostered a slowing economy. He says the U.S. is technically bankrupt, should stop spending now, and extend the Bush tax cuts forever. He is also in favor of abolishing income taxes altogether, and minimizing the role of government.
Here is an edited version of our conversation.
Jennifer Schonberger: Do you think a lack of a clear policy and/or new regulation has dented the economic recovery and created a slowing economy?
Congressman Ron Paul: Absolutely. It's the uncertainty of the future that is the biggest problem. We have no clear understanding of what taxes will be, what the regulations mean, the cost of the medical care bill, or what cap and trade will be like. On top of that we have so many problems due to malinvestments, and excessive debt from the bubble economy. You combine the uncertainty of the future with what Congress and the Fed are going to do, along with the inability to allow the corrections [in the economy] that are necessary because of government interference, and that's why we're in this mess today.
Schonberger: I recently spoke with Peter Schiff, who told me he believes we're in the early stages of a depression, specifically that the government's policies of massive stimulus and zero interest rates have positioned the U.S. for an inflationary depression in which Americans will watch their standard of living plunge. Do you agree?
Paul: I have no disagreement with that at all. I think we are, and I think that our economy has actually been getting weaker for a whole decade. We have 2.3 million fewer people employed than we had in 2001, yet the population had increased by 26 million. Real GDP has actually fallen as a result of Congress' desperate and improper attempt to try to correct this by spending $3.7 trillion in the last couple years. We didn't get one cent worth of value out of this. If you look at the nominal GDP growth from this $3.7 trillion investment, it's $100 billion of GDP. Of course, if you factor in the inflation factor, it's actually falling. This is devastating. The deflationary pressures are very heavy, and the only thing they offer is inflating the money supply. That's why I agree with the inflationary type of depression.
Schonberger: You mentioned the degree of government spending. On the U.S. deficit, do you think the U.S. is essentially bankrupt now, if it can't pay its future bills?
Paul: Yes. They're technically bankrupt, in some sense of the word. The initial indication of our bankruptcy and our inability to meet our commitments occurred in 1971 with the breakdown of Bretton Woods. Our country couldn't meet its commitments because we were printing dollars. We said we had assets to back those dollars in gold, and then we ran out of gold. But the amazing thing is the world still trusted us. This has continued to allow us to even get further and further in debt.
This is a reaction to the fact that by perceptions, the world believes that we are the strongest military and economic power -- and indeed we have been. But that's coming to an end. Statistics have shown that we've actually been in a slump for 10 years. Our policies are failing. It's just a matter of time when the world shifts their attention away from the dollar and into another currency, or into hard assets of some sort. This is when the bankruptcy will become apparent to everybody, because our dollars won't work.
Schonberger: Many say the Fed has done its job and now it's up to Congress, the administration, and fiscal policy. What type of fiscal policy can we undertake now to pull the economy back from the slowing growth we're seeing and create a sustainable pro-growth track?
Paul: We in the Congress should be cutting spending way back. Instead of Congress backing off, they think the solution is more of the same. They tried $3.7 trillion and it didn't work. And now they talk about another episode of quantitative easing. It's just more of the same. If it doesn't work, why continue to do it? What we're doing now is we're prolonging the agony.
The fiscal policy should be slashing spending and getting the government out of our lives. We shouldn't pretend that we can maintain a world in power and a welfare state at home. We should cut back on taxes, reduce regulations, let people know exactly where we stand so that the people can start paying down their debt, liquidate the debt, and get back to the basics as quickly as possible.
If we did that, it would be rough. But in a year or so, it would be all over. But politically, it's not going to happen. The political will is not there. People expect to be taken care of, and the politicians can't believe that hands-off is the best method. So the spending will continue; it's going to get worse until the dollar is destroyed.
Schonberger: What should we do about the Bush tax cuts? Should we allow the tax cuts for the top tax bracket to expire, as the administration favors?
Paul: We should extend them forever. We should never raise taxes. We should keep lowering taxes for everybody. To think that they can bail out of this economy by putting higher taxes on higher income people -- that won't help anything. Psychologically it would be very bad, and it would be taking away capital that you need.
Schonberger: What do you think about reforming the tax system now to try to foster growth? In that regard what do you think of Senators' Wyden-Gregg's proposal to simplify the tax system?
Paul: I don't know the details of theirs, but my guess is that wouldn't satisfy me. But, I think we have to revise them. I want to get rid of the income tax and the corporate tax ...
Paul: Just get rid of the whole thing ... I don't want the revenue. I don't want the government to spend the money. I want the people to spend the money. The people are smarter. We didn't have an IRS before 1913. Some of our greatest economic growth was in the latter one-third of the 19th century.
Now if you get rid of the income tax and not change the role of government -- yes, that's going to be devastating. That would just cause deficits to further explode. In order to get rid of the income tax, the people in this country would have to give up on the welfare state and the notion that we should be the policemen of the world.
... If we were serious about this, you could have a transition program. I would cut all the money we spend overseas and take care of the people who are dependent. We'd have enough money to help the people who are so dependent on medical care and education benefits. But I think the direction is so important, and the people have to believe this in order to get their confidence back.
Stay tuned for Congressman Paul's thoughts on financial reform and how to fix Fannie Mae and Freddie Mac.