Can History Save Us From A Depression?


The only solution to this disequilibrium is a recession in the United States or tax reforms in the rest of the world. Governments should bring the tax rates down in Europe and Japan and even more in the Third World. The highest tax rates in the world now are in Central America, South America, and sub-Sahara Africa, where no economic activity can really take place, because as soon as any occurs that’s visible to the tax collector, the government confiscates the profits.

The common wisdom today says that the trade deficits and the budget deficits are looming over the economy in America, that they are the fundamental problems this economy faces. And according to many, they’re a function of irresponsible tax cuts.


Those who make that argument are essentially correct, except that they’re talking from the standpoint of those who would correct the problems by having a depression. They’re part of the wrong solution—the one we really don’t want to choose. Even those who are saying, “We must have a recession to correct the disequilibrium,” can be faintly heard every now and then saying, “Well, yes, Germany and Japan should expand.” But it’s a kind of weak call, because they don’t really understand the supply-side position. They know that there’s something to what we say, but they’re far more convinced of their own solution. So they say, “Even though we may have to go through some pain, better do it now than later, before it gets worse.”

But I think that as long as we have a sense that we can get past these current difficulties, we’ll be okay—if President Reagan can hang on with his commitment to keeping us out of recession through the rest of his term. Which means, as he puts it, to not allow deleterious tax increases to slow the economy down, to not permit protectionist trade legislation to be enacted, and to not get caught up in some great monetary error.

So, what triggered the crash of ’87?

The feeling, worldwide, that the President has lost his dominant position in being able to manage this great economy. And the perception that the Congress of the United States, controlled by the Democratic party—which at this point in history is a party of pessimists—believes we must have trade legislation, we must have tax increases, we must even have a recession. All these threats are the real ogres now hanging over the market as a result of the world market’s loss of confidence in President Reagan’s ability to manage things.

But how do we solve the problem of the trade deficits? Let the dollar fall into oblivion?

No. Letting the dollar fall is inflationary. We could get into a 1979–80 cycle, in which the markets would see the value of financial assets evaporate in a monetary inflation.

That would be a trade war by other means, wouldn’t it?

Yes. There are three major threats to the economy: a monetary inflation; increased taxation that could bring about a recession by reducing domestic profit opportunities; and increasing tariff walls through protectionist trade legislation that could reduce and diminish the United States as a magnet for capital. These three things could bring about the kind of recession that would make us poor enough to correct the trade deficit.

See, once you’re poor enough, you can’t afford the goods of the rest of the world, so you don’t buy them. You’re even too poor to buy the goods that you’ve produced yourself. So you sell them at going-out-of-business prices to the rest of the world. You have a fire sale. All of a sudden you have huge trade surpluses. This is what happened in the 1930s in the United States. Every month, month after month, the Department of Commerce would announce, “Well, the unemployment rate has gone up, but the good news is that the trade surplus has gotten bigger.” We ran a trade surplus throughout the Depression.

So a trade surplus is not necessarily a sign of economic well-being?

No, it’s not. You have to be able to look at the conditions. The trade surplus after World War I and after World War II was a sign of great strength in the United States, because the rest of the world was buying goods from us in order to rebuild, giving us financial assets in exchange. But now the trade deficit that we’re having is a sign of great vitality because the capital inflows are arising out of the fact that we now have enacted the lowest tax rates on individuals in the world and we have become a magnet for capital. There is a great potential now for producing enough wealth to pay off the investments of the rest of the world, down the line. The rest of the world is really buying income streams; they’re buying annuities here.

I think the only real solution to the trade deficits and the budget deficits is to go back again, again and again, to persuade the rest of the Western industrial democracies to reduce their tax rates, to expand. Not to reflate but to grow.