The American Spectator

Special Report

Prepare for the Worst

By Peter Ferrara on 10.8.08 @ 12:08AM

Just two weeks ago, a book on economic policy was released that will be a classic for the ages. Entitled The End of Prosperity, by Art Laffer, Steve Moore, and Peter J. Tanous, the book explains in full detail the economic disaster that will befall America if it takes a sharp left turn to neo-socialism under the leadership of the far left President Barack Obama, the ultraleft Speaker of the House Nancy Pelosi, Senate Majority Leader Harry Reid with 60 liberal Democrat Senators, and their pal the ultraliberal Howard Dean heading the Democrat party.

Indeed, one of the insights of the book is that a major factor already tanking the stock market and leading foreign capital to flee America is the threat of the economic policies promised by Obama. Obama proposes increases in every major federal tax, on savers, investors, employers, small business, big business, and anyone who would start a business. Obama also promises to add additional federal spending of almost $1.5 trillion over the next four years, including a new global war on poverty in which Obama would tax Americans and send the money to the UN to spend worldwide (already introduced by Obama in legislation). That would be on top of all the spending increases already scheduled for our exploding entitlements and other programs. Obama also promises a massive increase in regulatory controls, even though government regulation is already estimated to cost America over $1 trillion per year, about $8,000 in lost output for every U.S. household. Then there is Obama's attack on free trade and promises of protectionist trade policies that contributed so much to the Great Depression.

As the authors show, these retrograde economic policies are intellectually indefensible. They do not offer forward looking change, but would take us back to the policies of the disastrous 1970s and even worse 1930s. They would ultimately produce a deep, long term decline in America's standard of living, particularly for the middle class and working people. America would actually fall behind countries around the world that, exactly contrary to the left wing swing of the Democrats, have been racing to adopt precisely the hugely successful Reagan supply side policies of low tax rates, less government spending, deregulation, and anti-inflation monetary policies.

The Reagan Economic Boom
When President Reagan entered office in 1981, succeeding Jimmy Carter who had an overwhelmingly liberal Democrat Congress, the American economy was in shambles. Inflation had reached 11.6% in 1979 and 13.5% in 1980, a devastating 25% increase in prices in just two years. The prime interest rate had reached 21.5% in 1980, with home mortgage interest rates soon climbing as high as an absurd 14.7%. Unemployment began an upward climb during the Carter years that eventually peaked at over 10% in 1982.

The poverty rate actually started increasing in 1978 during the Carter years, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982. Average real family income for the lowest income 20% declined by 14.2%. Indeed, during the Carter years (1977 to 1980), real income declined for every quintile, from the lowest 20% to the highest 20%. Real average income of U.S. households was, in fact, in a long-term decline, down rather than up from 1970 to 1980.

The Reagan economic policy to reverse this economic devastation consisted of the following:

1. Tax cuts to restore incentives for economic growth, involving first a reduction in the top income tax rate of 70% down to 50%, which probably produced a net increase in revenue by itself, and then a 25% across the board reduction in income tax rates for everyone. The 1986 tax reform then reduced tax rates further, leaving just two rates, 28% and 15%;

2. Spending reductions, including a $31 billion cut in spending in 1981, close to 5% of the federal budget then, or the equivalent of about $150 billion in spending cuts for the year today. In constant dollars, non-defense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% 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% from its 1981 level in constant dollars. Even with the Reagan defense buildup, total Federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989. That's a real reduction in the size of government relative to the economy of 10%;

3. Anti-inflation monetary policy restraining money supply growth;

4. Deregulation, which has now saved consumers an estimated $100 billion per year in lower prices. Reagan's first executive order, in fact, eliminated price controls on oil and natural gas. Production soared, and the price of oil declined by over 50%;

5. Free trade, reflected in worldwide agreements to reduce tariff taxes.

This was the most astoundingly successful economic policy in U.S. history, turning around a rapidly declining economy into a raging economic boom. The Reagan recovery started in official records in November, 1982, and lasted 92 months without a recession until July, 1990, when the tax increases of the 1990 budget deal killed it. This set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.

During this 7 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 boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were created during the boom, increasing U.S. civilian employment by almost 20%. Unemployment fell to 5.3% by 1989. Also in that year, labor force participation reached a record 66.5 percent, and 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 by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20% during the boom. The Carter decline in income for the bottom 20% of income earners was reversed, with average real household income for this group rising by 12.2% 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 rise in inflation during the Carter years was also reversed. Spectacularly, inflation from 1980 was reduced by more than half by 1982, to 6.2%. It was cut in half again for 1983, to 3.2%. The prime rate was cut by two-thirds by 1987 to 8.2%, on its way down to 6.25% by 1992. New home mortgage rates also declined steadily, reaching 9.19% by 1988, on their way down to 8% by 1992. Note that opponents of the Reagan tax cuts had argued that they would increase interest rates.

Letter to the Editor

topics:
Taxes, Trade, Barack Obama, Harry Reid, Business, Federal Budget, Entitlements, Global Warming, Russia, NATO, Socialism, Energy, Oil, Unions