Consumers are spending and business is beginning to ramp up its investment engines. Anything above a 4% growth rate is exhausting for business—capacity is exhausted, inventories are exhausted, more employees will be needed and old plant and equipment will have to be replaced.

An economic system that combines jobs for all with economic equality is the stuff of fairytales. An economy can be either efficient or just, but not both when taken to extremes.

An efficient economy operates within a free-market economic system that is blind to social justice. The economy cares only about the most efficient way to produce goods and services. It is an amoral system that, in order to be efficient, requires each of us to earn enough income to buy back what we produce.

A system driven by economic justice redistributes wealth through a tax system, giving the rewards of a few to the under-producing many. We tried this before and it didn’t work.
In the 1970s, our economic system worked somewhat the way I just described. Government policies that focused on stimulating aggregate demand had caused an economy that could not produce goods and services fast enough to keep up with demand; prices skyrocketed, interest rates were out of sight and productivity was low. Dividends were taxed at 70%, and the top earned income tax bracket stood at 50%. Accountants and lawyers devised tax shelters that had little or no economic value to allow the wealthy to avoid paying taxes. This process provided little incentive to work and produce efficiently.

By late 1980, it was such a mess that a bipartisan Joint Economic Committee of Congress recommended our entire system for managing the economy be changed. Instead of focusing on the demand side, as had been the case since the Great Depression, the focus would shift to unleashing the productive potential of the economy.

It was reasoned that by cutting taxes, but applying the tax bite in a different way, production of goods and services could be stimulated. Prices would come down, jobs would be created, and more importantly, tax revenues would increase. Investment was stimulated with investment tax credits and a lower tax on capital gains.

The Committee was right—as the history of the ’80s and ’90s tells us. When taxes were raised by the elder Bush and early Clinton, the economy stumbled. When taxes were cut by Clinton in 1996 and later by Bush II, we have seen our economy rebound.

Taxes provide economic justice, and for good cause. The time will come later in this expansion when the need for justice will trump the need for efficiency. When that happens, watch for the economy to come to a screeching halt. In the meantime, we need economic efficiency to put people back to work.