Thomas Sowell: Eliminating Bush Tax Cuts Is ‘Madness’

Wednesday, 25 Aug 2010 10:20 AM

By Dan Weil

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Author Thomas Sowell scoffs that the very idea of eliminating the Bush tax cuts to reduce the federal deficit is simple “madness.”

And while inflation has been quiet of late, that’s not likely to last given the Federal Reserve’s accommodative monetary policy, says Sowell, a senior fellow at the Hoover Institution.

“It’s remarkable we don’t already have it (inflation),” he told Newsmax.TV.

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“The reason is that people are sitting on all this money that’s being manufactured. Once the money does start to move, the risk of inflation is very substantial.”

As a result, gold’s rally isn’t a bubble, says Sowell,  author of "Dismantling America: And Other Controversial Essays"

Also supporting the metal are the huge budget deficit – estimated at $1.47 trillion for this year – and the fact that agencies such as the Federal Deposit Insurance Corp. (FDIC) and the Federal Housing Administration (FHA) are suffering financial shortfalls, he says.

“It’s only a matter of time before they will have to come to the government for money, and that’s when the Fed will have to print more money.”

The government is repeating the mistakes that caused the financial crisis, Sowell says.

“For example, the mistake of thinking politicians in Washington can determine what ought to happen in the housing market and the idea they ought to intervene to make it easier for those people they favor to have houses.”

He’s no fan of Fannie Mae and Freddie Mac. “They are at the heart of the housing boom and bust,” Sowell said.

“All the artificially lowered lending standards imposed on private lenders were viable only because lenders could lend to people who weren’t likely to pay back and then sell the mortgages to Fannie Mae and Freddie Mac.”

The best strategy would be to eliminate the two agencies, otherwise we risk more housing bubbles, Sowell says.

He agrees with House Republican Leader John Boehner’s recommendation for President Barack Obama to fire his economic team. There is a chance that Treasury Secretary Timothy Geithner will be canned after the election, Sowell says.

But, “the president isn’t about to fire any of these people before the election, since that would be an admission of the disaster they’ve created.”

If the Bush tax cuts aren’t extended, tax revenue will likely fall, Sowell says. Many people are confused between tax rates and tax revenue, he says. When tax rates were lowered under President George W. Bush, President Reagan and President Kennedy, tax revenue increased.

“The idea that we’re going to reduce the deficit by eliminating the Bush tax cuts is madness, because all empirical data indicate revenues have gone up after most of these tax cuts.”

And when will the economy fully recover?

“After this administration is prevented from driving us deeper into the hole,” Sowell said. “This fall’s election will be the last chance to stop that.”

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