The Fed Tax on Savers: Low Interest Rates

Rasmussen poll indicates that only 12 percent of probable voters favor a budget that increases spending. Here Cato Institute’s Richard Rahn explains why a return to the days of Thatcher and Reagan is so necessary and why the Fed is a big enabler in today’s tragic spending spiral.

As every rational person should understand, the current situation is unsustainable, and there is no tax solution to spending as a rising share of GDP. In fact, tax increases will only make the situation worse by further slowing private-sector growth and increasing the demand for government services and payments.

The cures are well known. Junk government agencies, programs and regulations that do not meet cost-benefit tests, of which there are many. Even President Obama acknowledged a couple of weeks ago that some government agencies have “outlived their usefulness” — even assuming they were useful to begin with. Turn back to the states, where they belong, programs that are not specified in the Constitution as within the purview of the federal government. A list of useful recommendations of where to reduce government spending may be found at DownsizingGovernment.org.

The continued inaction by Congress can be attributed to lobbying by the dependency class against necessary program reductions, as well as a misunderstanding by a majority of the people of how excessive government spending is denying them income by reducing wage growth and job opportunities. It also depresses their return on savings as the Fed has chosen to, in effect, levy a tax on savers in the form of low-interest rates, rather than to recognize the cost of excessive government spending through inflation.

Change will only come when the majority of the people understand that enough is enough and throw the reality-deniers, policy liars and the timid out of Congress or force them to change their spots. The British had had enough in the late 1970s and elected Margaret Thatcher. A year later, Americans had had enough and elected Ronald Reagan. Who is next?