Taxation, Regulation, Spending, Monetary Policy - What Matters Most?

Taxation, regulation, spending, and monetary policy all have a big impact on a nation's economy.  But what matters most?  Of course, it depends on the degree of each one.  If there were a regulation that said you are not permitted to start a business unless you first hire 100 employees, then this would almost completely stifle a nation's economy if enforced.  If you have a lot of regulations and yet they do not really impose any significant cost to businesses and individuals, then it will not harm the economy much.

The same goes for all of these.  And really, all of these things are inter-related in different ways.  Taxation can affect spending and spending can affect taxation.  The same can be said with monetary policy.  The size of government affects all of these areas.

But if you could fix one thing first, what would it be?  It is difficult to say.  If you didn't have a central bank and the government did not have a monopoly on the money supply, then it would not be able to spend as much.  It would also not be able to run up massive debt.  The federal government would be more like state governments are today.  It could still spend quite a bit and do a lot of damage, but it would be forced to scale back in hard times.

On the other hand, if you dramatically cut spending, then it would not be necessary for the central bank to create money out of thin air.  The debt monetization would not be needed.  You don't need a central bank to buy government debt if there is no government debt to begin with.

Regulations are quite difficult to measure.  Just by being aware of the many thousands of pages of regulations put out by Washington DC, you have to know that they are a significant cost to Americans.  Even here, if there were very low spending and taxation, many of these regulations would not be enforceable.

I used to think that taxation was the biggest issue in driving an economy.  While I still think it is very important, I'm not sure that it is the number one thing to look at.  The 1950's in America were a relatively prosperous time.  Think of Leave It To Beaver.  The husband went to work.  The wife stayed home.  Times were pretty good for most Americans.  Medicine was cheap.  That part we can thank the low regulations in healthcare at the time.

However, the 1950's also had one of the highest marginal tax rates in history.  You can see the history here.  The top tax rate was over 90% at some points in the 50's.  This was draconian.  Luckily, taxes for the average American were much lower.  Overall spending was much lower.  Deficits were low.  Monetary inflation was relatively low.

I think the biggest drivers of a nation's economy are monetary policy and overall spending.  They are related.  If the government didn't spend so much, we would have lower taxes and more stable money due to less debt.  But again, the government wouldn't spend so much without the Fed there to create new money out of thin air.

Monetary policy is huge.  Debasing the money is really degrading to a civilization.  It redistributes wealth.  It misallocates resources.  It rewards debtors at the expense of savers.  It causes bubbles, booms, and busts.  It allows government to continue to grow.  It allows government to run up the debt.  It allows government to start wars without new taxation.  It allows banks to take bigger risks.

In conclusion, all four of these areas are important to an economy.  While tax reform and tax relief are important,  I believe the government and central bank's control over the money supply is the biggest factor, along with the overall spending.