The George W. Bush tax cuts have nothing to do with supply-side economics. The Bush tax cuts were nothing but a greedy grab, but they are not a signifiant cause of today's inequality. The main causes of the unacceptable inequality of income and wealth in the US today are financial deregulation and the dismantling of the ladders of upward mobility by the offshoring of manufacturing and tradable professional service jobs. The wages and salaries denied to Americans are transformed into corporate profits, mega-million dollar executive bonuses, and capital gains for shareholders. Financial deregulation unleashed massive debt leverage of bank depositors' accounts, backed up with Federal Reserve bailouts of the banksters' uncovered gambling bets. Neither tax increases nor reductions can compensate for these extraordinary mistakes.
Intelligent people over the centuries have stressed that failure to understand the past endangers the present and the future. Across the American political spectrum policymakers, economists, media, commentators, and the public are ignorant of the past and in denial about the present. Those trying to inform are few and far between, and they are constantly under attack from the very people they are endeavoring to inform. What is the point of the effort to inform? Is it merely "sound and fury, signifying nothing"?
Some claim that stagflation was caused by the OPEC oil embargo in 1973, not by the interaction of demand management with high marginal tax rates. The claim is incorrect. By 1971 high US inflation had already wrecked the Bretton Woods fixed exchange rate system.
US inflation forced President Nixon to close the gold window in 1971. Under the Bretton Woods fixed exchange rate system, the currencies of countries were fixed to the dollar, and the dollar was fixed at $35 per ounce of gold. Foreign central banks could redeem dollars for gold. Gold redemption was regarded as a constraint on US money supply growth.
By 1971 the rate of US inflation was 6 percent. The US gold stock had fallen substantially from its 1960 level. Alarmed by countries redeeming their dollar holdings for gold, the Nixon administration closed the gold window and ended the conversion of dollars into gold.
Economists ascribe the monetary inflation that predated the 1973 oil embargo by many years to the Federal Reserve's accommodation of President Johnson's "guns and butter" fiscal policy in the 1960s (Vietnam War + Great Society programs).
A common mistake is to claim that oil producers can cause inflation by raising oil prices. Higher oil prices can cause higher costs of production and less output but cannot cause a rise in the general level of prices. In the absence of monetary inflation, higher costs in some areas divert purchasing power from other areas. Costs rise and output falls, but there is no rise in the general price level.
Economists understand that inflation is a monetary phenomenon. For there to be a rise in the overall level of prices, either the supply of money or the rate at which money turns over (velocity) must rise. Generally, a rise in the velocity of money is a response to rising prices as the willingness to hold depreciating currency declines.
In countries with significant imports, declines in the exchange value of the currency can boost domestic inflation with rising import prices, but generally declines in currency exchange values are caused by domestic monetary inflation. However, a country with a dominant currency can manipulate the exchange values of currencies of smaller economies or impose sanctions which reduce the value of the targeted country's currency. In a system of flexible exchange rates, international capital flows in and out of countries can destabilize the economies.
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