Ronald Reagan understood the importance of clear statements for real change. That is why, in February 1975, in the depths of the Republican collapse after the Watergate scandal, he told CPAC, the annual conservative convention, that conservatives had to nail their cause to banners of bold colors and avoid pale pastels.
Reagan used this strategy throughout his political career. He had defeated a popular incumbent California governor by more than a million votes because Reagan boldly and clearly declared his opposition to university student radicals, his rejection of more spending and higher taxes, and his commitment to bringing efficiency and eliminating waste in Sacramento.
He again contrasted his clear, profound beliefs with the temporizing “realism” of the Republican establishment in his 1976 presidential primary campaign against President Jerry Ford, when Reagan passionately advocated America’s retention of the Panama Canal. His utter refusal to appease the Panamanian dictator was a stark divergence from Ford’s “realistic” policy of negotiating the canal’s surrender. And of course, in 1980 Reagan again offered Americans a clear choice between his vision of a resurgent America and President Carter’s focus on adapting to American decline.
We can successfully apply Reagan’s example across America, even in the bluest states. In California, 64 percent of voters opposed the 2009 ballot propositions to raise taxes. If a candidate in that state’s 2010 gubernatorial election could galvanize those voters by staking out a convincing (albeit, according to the elites, unrealistic) strategy for fundamentally changing Sacramento, she will have a real opportunity to develop a massive majority to take on the machine.
Similarly, the New York machine has alienated a vast swath of the electorate with its heavy taxes, poor service, corrupt bureaucracy, and privileged unions. With the political class catering to interest groups rather than the general public, there is an opening for Rick Lazio or any other candidate with the courage to advocate replacement over reform. A candidate who vows to shrink Albany and return taxpayers’ money to the rest of the state will enrage the union leadership and the big lobbyists, but he just might arouse enough enthusiasm among voters to overturn the machine.
THREE WINNING QUESTIONS
The 2010 and 2012 elections offer a historic opportunity for conservatives to channel Americans’ widespread dissatisfaction with government into an energetic movement to finally replace the secular-socialist machine. We should boldly propose a replacement model, drawing clear distinctions between our policies and those of our opponents.
There are three questions in particular we can ask whose answers will point to the need for a replacement strategy. Those questions are:
1. Who are we?
2. What will it take to compete successfully with China and India and remain the most innovative, most productive, and most prosperous country in the world?
3. What threatens America, and what do we have to do to remain safe?
We discussed the first question in chapter one: we are an honest, entrepreneurial, democratic, and God-fearing people struggling against a corrupt, undemocratic, secular-socialist machine buried deep within the government bureaucracy. The solution is to replace that bureaucracy, not to reform it.
In the following chapters, I will discuss the other two questions, and why their solutions also require a replacement model. I will show why, on issue after issue, the Left’s high-tax, big-bureaucracy, heavy-litigation system is incapable of keeping America globally competitive. And I will demonstrate why the Left’s national security paradigm makes America substantially less safe.
All these policies are beyond hope of success. They cannot be tinkered with or renewed or reformed. They can only be abolished entirely and replaced with new ideas that work.
CHAPTER TWELVE
A New American Prosperity
With Peter Ferrara, Director of Entitlement and Budget Policy at the Institute for Policy Innovation
The 1970s, when the Left last controlled Washington, was a time of disastrous economic policy failure that should never be repeated. Unfortunately, President Obama and the secular socialists now running Washington seem determined to bring about an even bigger debacle.
Three ever-worsening recessions pounded the U.S. economy from 1969 to 1982. Inflation soared to 11.6 percent in 1979 and 13.5 percent in 1980, a devastating 25 percent increase in prices in just two years. The prime interest rate reached 21.5 percent in 1980, with home mortgage interest rates soon rising to an absurd high of 14.7 percent. Unemployment began an upward climb during the Carter years that eventually peaked at over 10 percent in 1982.
The poverty rate began increasing in 1978, eventually shooting up an astounding 33 percent, from 11.4 percent to 15.2 percent. A fall in real median family income that began in 1978 snowballed to a decline of almost 10 percent by 1982. Average real family income for the poorest 20 percent of Americans declined by 14.2 percent. Indeed, during the Carter years (1977 to 1981), real income declined for all Americans, from the lowest 20 percent to the highest 20 percent. Real average income of U.S. households was, in fact, in long-term decline from 1970 to 1980.
REAGANOMICS
In 1981, newly elected President Reagan abandoned long-fashionable Keynesian economic policies—the interventionist, big-government, “stimulus” approach that had produced these dismal results. Instead, he explicitly campaigned on, and then implemented, four specific economic policy components that became known as Reaganomics:
1. Tax cuts to restore incentives for economic growth. The top income tax rate of 70 percent was first cut to 50 percent, which probably produced a net increase in revenue by itself, and then there was a 25 percent across the board reduction in income tax rates. The 1986 tax reform reduced income tax rates further, leaving just two rates—28 percent and 15 percent. Thus, the top rate fell from 70 percent to 28 percent over five years.
2. Spending reductions, including a $31 billion cut in 1981. This was close to 5 percent of the federal budget then, or the equivalent of about $180 billion of spending cuts in a year nowadays. In constant dollars, non-defense discretionary spending declined by 14.4 percent from 1981 to 1982, and by 16.8 percent from 1981 to 1983. Moreover, in constant dollars, this non-defense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms. By 1988, this spending was still down 14.4 percent from its 1981 level in constant dollars.
Reagan’s spending discipline led to several difficult struggles, including an illegal strike by air traffic controllers that forced him to choose between adopting inflationary spending increases and firing the controllers. So Reagan retained his policies and hired new controllers. The air transportation system survived, and the economy flourished. Even with Reagan’s defense buildup, total federal spending declined from a high of 23.5 percent of GDP in 1983 to 21.3 percent in 1988 and 21.2 percent in 1989. That’s a real 10 percent reduction in the size of government relative to the economy.
3. Anti-inflation monetary policy emphasizing the value of the dollar and restraining money supply growth, which led to much lower interest rates once inflation was tamed.
4. Deregulation, cutting red tape, and reducing bureaucracy saved consumers an estimated $100 billion per year in lower prices. Reagan’s first executive order eliminated price controls on oil and natural gas. Production soared, and the price of oil declined by more than 50 percent. This was a remarkable contrast to President Carter’s gasoline rationing, which limited us to buying gasoline every other day depending on the last number of our license plate. From scarcity of gasoline to abundance in six months—this was one of Reagan’s first evident accomplishments.
Collectively, these were the most successful economic policies in U.S. history, turning a rapid economic decline into a raging economic boom. The Reagan recovery officially began in November 1982 and lasted ninety-two months without a recession until July 1990, when the tax increases of the 1990 budget deal ended the streak. This set a new record for the longest peacetime expansion ever, the pr
evious high being fifty-eight months.
During these seven years, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy. In 1984 alone, real economic growth shot up 6.8 percent, the highest in fifty years, as nearly 20 million new jobs were created during the boom, increasing U.S. civilian employment by almost 20 percent. Unemployment fell to 5.3 percent by 1989 (almost half what it had been at the peak of the Carter recession). Labor force participation reached a record 66.5 percent that year, when a record 63 percent of the population was employed. Black labor force participation also hit a record 64.2 percent in 1989, with female labor force participation reaching an all-time record of 57.5 percent in 1990.
Real per capita disposable income increased 18 percent from 1982 to 1989, meaning the American standard of living grew almost 20 percent during the boom. The Carter decline in income for the bottom 20 percent of income earners was reversed, with average real household income for this group rising 12.2 percent from 1983 to 1989. The poverty rate, which had started increasing during the Carter years, declined every year from 1984 to 1989, dropping by one-sixth from its peak.
The shocking Carter-era rise in inflation was also reversed under Reagan. Spectacularly, inflation was reduced by more than half between 1980 and 1982, to 6.2 percent, and then was cut in half again for 1983, to 3.2 percent. The prime rate was cut by two-thirds by 1987 to 8.2 percent, going down to 6.25 percent by 1992. New home mortgage rates also declined steadily, reaching 9.19 percent by 1988, then 8 percent by 1992. This disproved a common argument made by opponents of Reagan’s tax cuts—that they would increase interest rates.
The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade. Real personal assets rose 36 percent, from $15.5 trillion in 1980 to $21.1 trillion in 1990. Total real private net worth rose by $4.3 trillion from 1980 to 1989, totaling $17.1 trillion in constant dollars, an increase of one-third.
Even with the Reagan tax cuts, total federal revenues doubled from 1980 to 1990, growing from $517.1 billion to just over $1 trillion. In Reagan’s last budget year, fiscal 1989, the federal deficit declined to $152.5 billion, about the same as a percentage of GDP as in 1980, 2.9 percent compared to 2.8 percent.
THE 25-YEAR REAGAN BOOM
In their incisive and prescient book The End of Prosperity, supply-side guru Art Laffer and Wall Street Journal chief financial writer Steve Moore note that Reagan’s recovery grew into a 25-year boom, with just slight interruptions by short, shallow recessions in 1990 and 2001. They write:
We call this period, 1982-2007, the twenty-five year boom—the greatest period of wealth creation in the history of the planet. In 1980, the net worth—assets minus liabilities—of all U.S. households and business . . . was $25 trillion in today’s dollars. By 2007. . . net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.1
Similarly, Steve Forbes wrote in Forbes magazine,
Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy. Even in recent years the much maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy.
In other words, just the growth in the U.S. economy from 2002 to 2007 was the equivalent of adding China’s whole economy to the U.S. economy.
The 25-year boom was fueled by the tax cuts and other pro-growth policies adopted by the Republican congressional majorities in the 1990s, when I served as Speaker of the House. Indeed, the House passed a budget resolution in 1995 that would have cut federal spending by $1 trillion over ten years—and that was when $1 trillion was a lot of money. The full Congress did not implement all those cuts, but it did significantly reign in spending. This shows what can be accomplished by a change in political leadership.
Total federal discretionary spending, as well as the subcategory of non-defense discretionary spending, declined from 1995 to 1996 in actual nominal dollars. In constant dollars, adjusted for inflation, the decline was 5.4 percent. By 2000, total federal discretionary spending was still about the same as it was in 1995 in constant dollars. As a percentage of GDP, federal discretionary spending was slashed by 17.5 percent in just four years, from 1995 to 1999. Total federal spending relative to GDP declined from 1995 to 2000 by an astounding 12.5 percent, a reduction in the federal government relative to the economy of about one-eighth in just five years.
As a result, $200 billion annual federal deficits, which had prevailed for over fifteen years, became surpluses by 1998, peaking at a $236 billion surplus in 2000.
The much maligned Bush tax cuts of 2001 and 2003 also contributed to the 25-year boom. Restoring growth, they reversed the short, shallow 2001 recession and the economic damage of the 9/11 attacks. These cuts reduced the top income tax rate by 11 percent, the bottom income tax rate by 33 percent, the capital gains tax rate by 33 percent, and the dividends tax rate by 50 percent. After these rate cuts were fully implemented in 2003, the economy created 7.8 million new jobs, and the unemployment rate fell from over 6 percent to 4.4 percent. Real economic growth over the next three years doubled from the average for the prior three years, to 3.5 percent. Business investment spending, which had declined for nine straight quarters, reversed, increasing 6.7 percent per quarter. Manufacturing output soared to its highest level in twenty years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled.
By 2006, capital gains tax revenues had doubled, despite—or, as we argue, because of—the 25 percent rate cut. In fact, over the past forty years, capital gains tax revenues have increased every time the capital gains tax rate has been cut, and revenues have fallen every time the rate has increased.
As Laffer and Moore noted in 2008, “The economy in real terms is almost twice as large today as it was in the late 1970s.” Moreover,
In 1967 only one in 25 families earned an income of $100,000 or more in real income (in 2004 dollars), whereas now almost one in four families do. The percentage of families with an income of more than $75,000 a year has more than tripled from 9 percent to almost 33 percent from 1967 to 2005.2
The authors also note, “A poor family in 1979 was more likely to be rich by the early 1990s than to still be poor.” They cite a Congressional Budget Office (CBO) study, backed up by a later Treasury Department study, finding that “from 1994 to 2004 Americans in the bottom 20 percent of income actually had the highest increase in incomes.” They continue,
When you track real families—real people—over time, you find that people who are poor at the start . . . have the biggest subsequent gains in income. Amazingly, the richer a person is . . . the smaller the subsequent income gains. Those in the top 1% actually lose income over time.
Or, as Nobel Prize winning economic historian Robert Fogel wrote in 2004, “In every measure that we have bearing on the standard of living . . . the gains of the lower classes have been far greater than those experienced by the population as a whole.” Under Reaganomics, the rich got richer and the poor got richer too.
THE KENNEDY TAX CUTS
Reagan was not the first to jumpstart the economy through sweeping tax cuts. It has happened four or five times in the last century with virtually the same result every time. One of these instances occurred under President Kennedy, who cut the top tax rate from 91 percent to 70 percent, with across the board rate cuts of 15 to 30 percent for the other tax brackets. Comp
ared to national income and the total budget, the Kennedy tax cut was three times larger than the Bush tax cut, which only reduced the top tax rate by a measly 4.6 percentage points, from 39.6 percent to 35 percent. As Kennedy declared,
Our true choice . . . is between two kinds of deficits—a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy—or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, produce revenues, and achieve a future budget surplus. The first type of deficit is a sign of waste and weakness—the second reflects an investment in the future.
A true supply-side tax cutter, Kennedy insisted tax cuts actually increase tax revenues, an argument the Left deny with religious intensity. Kennedy stated,
It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates. . . . [A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or profits.
In response to the Kennedy tax cuts, the economy grew by 10 percent in just two years, with the annual economic growth rate increasing 50 percent. More than 1 million jobs were created in the following four years, and unemployment fell to its lowest peacetime level in more than thirty years. Federal income tax revenues grew by 41 percent during those four years, causing U.S News & World Report to observe, “The unusual budget spectacle of sharply rising revenues following the biggest tax cut in history is beginning to astonish even those who pushed hardest for tax cuts in the first place.”
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