Of all the misguided initiatives to revive “industrial policy” currently underway, none is more foolhardy and risky than the massive intrusion into the financial markets under the guise of the rollback of the financial deregulation that has been officially designated the leading culprit in the meltdown of the past two years. It will lead to massive domination by government and increasing distortion of the capital markets as a result. And all of it could be avoided by looking at history, using common sense about what has truly been successful, and getting serious about our role as the keeper of the world’s reserve currency. We could start by reading a great book, Econoclasts, by Brian Domitrovic, which outlines the formulation, rationale, and history of the application of supply-side economic theory, with emphasis on the people who sparked the supply-side revolution beginning in the early 1970s. Essentially, the story is about monetary policy at least as much as about tax and fiscal policy, because the policy mistakes there have been the primary culprit in most of the crises of the past century, including this one. The most recent irony here is that the world’s champion of capitalism is now being lectured on monetary policy by a communist country that happens to be its leading creditor. The Chinese are not stupid—they hold $1.3 trillion of our debt and they know that the only way we can repay it is to inflate our way out of the problem and defraud the bondholders. Again, as the keeper of the world’s reserve currency, we have a higher obligation.
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