The problem of the Federal Reserve

by Sal on January 4, 2006

in Politics

The Fed announced yesterday that it would slow the rise of interest rates. This is good news. However, something needs to be done about the Federal Reserve system. There is too much power concentrated in the hands of fairly unaccountable officials. Many economists predicted that the rise in rates to 6.25% in 2000 would cause a recession — and it probably contributed. Now, we are slowing but probably stopping at 5% interest rates, which is above the 3.5% average. Rep. Ron Paul (R-TX) makes an interesting case for abolishing the Fed on the principle that most recessions of the last 30 years can be traced to Fed policy. I’m not sure I’d go that far, but it is a problem when the Federal Reserve holds the biggest influence on the state of the economy.

Short of making structural changes to the Fed (which probably should be examined), Congress should pursue an aggressive fiscal policy to ensure long-term economic vitality and short-term countering of any fed policies. Such measures could include:

  • Abolishing the Corporate Income Tax: Taxes on corporations are meaningless. Some may say that corporations should pay their fair share, but what ends up happening is that corporations just add the cost of the tax to the price of the goods or services it provides. There can then be several layers of taxation added to the cost of a good, one for the manufacturer, one for the distributor, and one for the retailer, which all end up being paid by the consumer anyways. (See this article)
  • Simplification of the Tax Code: I’m talking about large-scale simplification, not the so-called simplification proposed by the special commission. Go to a strict flat tax (17%) where everyone pays 17% of their income above some poverty line (say 20k single/40k married) regardless of their income level. This will remove the problems with the AMT, not punish success, and make filing and paying taxes simple. (See this page).

These two items will go a long way to strengthen our economy and allow us to compete in a much more competitive world economy for generations. Other reforms include the abolishion of the Captial Gains tax and taxes on dividends. Of course, to do all this, we also need to cut spending, but that’s an article for another day.

{ 1 comment… read it below or add one }

Mike January 4, 2006 at 11:23 am

I’m glad you posted on this topic Sal. My objection to the system is with its unaccountability. The fed’s “independence” that so many people praise is patently undemocratic.

Economic policy is a topic subject to many competing points of view. The merits and drawbacks of each position need to be explained and debated in the public square in order for the most beneficial policies to be implemented. A federal reserve that cannot be “fired” by the executive branch guarnatees an ivory tower approach to such important issues. And that always results in people having less control over the money they earned.

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