The old truism that those who fail to learn from history are
doomed to repeat it, holds true with principles of economics perhaps even more
that other areas. And the consequences of failing to learn from history are
felt by all when those who are impervious to, or ignorant of, the laws of
economics are our political leaders. Our current crop of political leaders
obviously qualifies for that group.
Last week we addressed the high cost of over-regulation and
its debilitating impact on economic growth and job creation. The logical sequel
to that column would be elucidation of the other factors that exacerbate the
nation’s economic doldrums, and stymies economic growth, versus proven policies
which, based on empirical data, have grown the economy and created jobs.
To see what policies work to expand the economy, we need
look no further back in history than the 1980s. Peter Ferrara, a former policy
wonk for the Reagan administration, penned a superb op-ed column for the Wall
Street Journal last month, in which he shared some startling data.
When Ronald Reagan took office in 1981, the economy was in
bad shape and taking a greater toll on individual Americans than even the financial
market collapse of 2008. Unemployment was peaking at 10.8%, and double-digit
inflation was eroding the buying power of the dollar dramatically, jumping 25%
in just two years from 1979-1980. Consequently, the poverty rate had increased
steadily from 1978, climbing an astounding 33% from 11.4% to 15.2% by 1982.
Median family income dropped by 10% nationwide.
With a four-pronged approach to the economy, Reagan was
determined to cut tax rates, which he did, reducing the top income tax rate of
70% to 50%, and then a 25% reduction for everyone else. Then in 1986 tax rates
were reduced further, to just two tax levels, at 28% and 15%.
Secondly, he was able to get congress to reduce government
spending a little, including a $31 billion cut in 1981, nearly 5% of the budget
at the time. Non-defense discretionary spending was reduced by 16.8% from 1981
to 1983. But after that even Reagan couldn’t control the spending of the Tip
O’Neil led congress, as it increased from $746 billion to $1.1 trillion, with
defense spending making up $120 billion of that increase. The only positive in
this regard was that, with the growing economy, spending was reduced from a
high of 23.5% of GDP in 1983, to 21.3% in 1988, representing a 10% reduction,
according to Ferrara.
Thirdly, monetary policy under Reagan restrained money
growth to maintain the dollar’s strength and curtail the destructive forces of
inflation on household purchasing power.
And finally, deregulation during the first term alone saved
U.S. consumers more than $100 billion per year in lower prices, further
combating inflationary forces in the economy. His first executive order
eliminated price controls Carter had implemented on oil and natural gas. The
result was soaring production which, coupled with an improving dollar, led to a
decline in the price of oil of more than 50%.
The results were remarkable. During the ensuing 92 months of
expansion (a U.S. record), the economy grew more than 30%, creating 20 million
new jobs, increasing non-farm payrolls by 20%, which reduced unemployment to
5.3% by 1989. Disposable income per capita increased by 18%, increasing the
standard of living by nearly 20% in just seven years. And significantly, the
poverty rate dropped by nearly 20% from its peak in 1984.
That’s the prescription for success for our struggling
economy. And it’s the polar opposite of what’s being done today. The Obama
administration is determined to raise taxes on everything and everyone (with
only a brief reprieve when congress extended the Bush tax cuts for two years).
Government spending growth has nearly doubled the federal debt from $7.8
trillion to over $14.3 trillion in just four years since Pelosi/Reid took over
congress. The Fed’s monetary policy has pumped over a trillion dollars into the
M2 money supply through Quantitative Easing I and II which has weakened the
dollar and contributed to commodity-based inflation, which will inevitably hit
consumers. And regulatory expansion has increased government control of nearly
everything and is choking the life out of private enterprise, and now costs us
(since businesses pass their costs on to consumers) over $960 billion per year,
according to the Wall Street Journal.
Our current economic policies are all antithetical to
economic expansion. But it takes time for fiscal and monetary policy to fully
take effect, which means things will inevitably get worse before they get
better. We won’t see the full effects of Obama’s policies until the tax
increases of 2013 kick in, and the full costs of the regulatory enactments have
hit on the spending side. Reaganomics launched the most rapid, sustainable
expansion of the U.S. economy in history. Obamanomics will have the opposite
effect unless corrected quickly.