The American Spectator

Special Report

Prepare for the Worst

By Peter Ferrara on 10.8.08 @ 12:08AM

(Page 2 of 2)

The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade. Real personal assets rose by nearly $6 trillion, from $15.5 trillion in 1980 to $21.1 trillion in 1990, an increase of 36%. 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 $1,031 billion, or just over $1 trillion. In Reagan's last budget year, fiscal 1989, the widely overballyhooed federal deficit had declined to $152.5 billion, about the same as a percent of GDP as in 1980. 2.9% compared to 2.8%. By 1989, the Soviet Union was collapsing. Reagan had won the Cold War without firing a shot, completing the most successful Presidency in U.S. history.

The 25 Year Reagan Boom
Laffer et. al point out that this Reagan recovery grew into a 25 year boom, with just slight interruptions by shallow, short 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.

They add, "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.

In addition, "A poor family in 1979 was more likely to be rich by the early 1990s than to still be poor." The authors cite a Congressional Budget Office 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." The authors 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 have gotten richer and the poor have gotten richer too.

The Kennedy Tax Cuts
Reagan was not the first or the last to adopt sweeping tax cuts to boost the economy. It has happened four, perhaps five, times in the last century, with virtually the same results every time. One of these was adopted under President John F. Kennedy, who cut the top tax rate from 91% to 70%, seeking as well a 30% across the board rate cut for everyone else. Compared 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 a measly 4.6 percentage points from 39.6% to 35%. Kennedy said,

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.

Kennedy also said, "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% in just 2 years, with the annual economic growth rate increasing by 50%. More than 1 million jobs were created in the following 4 years, and unemployment fell to its lowest peacetime level in more than 30 years. Federal income tax revenues grew by 41% during those 4 years, with U.S News and World Report saying, "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."

The End of Prosperity
Laffer et al. explain why they think the end is now near:

[W]e are now witnessing nearly all of the economic policy dials that were once turned toward growth being twisted back towards recession. [O]ur politicians in both parties, but especially the liberal Democrats, are getting everything wrong -- tax policy, regulatory policy, monetary policy, spending policy, trade policy. We call this the assault on growth. The political class seems to be almost intentionally steering the United States economy into the abyss -- and, to borrow a phrase from P.J. O'Rourke, the American electorate, alas, seems ready and willing to hand them the keys and the bottle of whiskey to do it.

Obama promises across the board tax increases, America's corporate tax rates are already the second highest in the industrialized world, prices are already rising and the dollar is declining, America is turning its back on free trade, the federal budget is already spiraling out of control and entitlements threaten far worse, regulations already strangle energy production, producing high energy costs for the economy, cap and trade global warming regulations threaten to shut the economy down, unions calling for legal powers to force unionization, the left campaigns for costly but low quality socialized medicine, these are all indicators of a fatal economic heart attack for America. Laffer et al. explain what is behind the current financial crisis:

This list of economic body blows explains why, for the first time in years, hot capital is escaping over the borders out of the United States and flowing into China, India, Europe, and even Japan....[S]tarting in late 2007, foreigners started pulling their money out of the United States, and Americans started investing more abroad. Global investors are losing confidence in the U.S. The result is a falling stock market and a collapse of the dollar.

The threatened left-wing economic policies are all the more dangerous now because the rest of the world has shifted so sharply towards much lower tax rates and free markets, threatening to leave America in the dust as an uncompetitive wasteland mired in nostalgia for socialism. Since Reagan, income tax rates across the industrialized world have been cut by more than one-third, and corporate tax rates have been reduced by one-half. The flat tax has been adopted in 24 countries. Putin adopted a 13% rate for Russia that raises more revenue than the former system with a 50% top rate. From 1978 to 1998, China reduced its tax burden by two-thirds. A recent study found that "supply-side" countries that have cut their tax rates almost in half since the 1990s have grown three times as fast as countries that have raised taxes since that time.

It is, frankly, obvious that lower tax rates increase incentives for economic growth and productive activity, and that higher tax rates reverse such incentives. Nor is it hard to understand that increasing regulatory costs will slow the economy while reducing such costs will expand it. Obviously, ample supplies of low cost energy will help the economy, shortages of high cost energy will kill it. High government spending is clearly not good for the economy, lower government spending is. We know how to create an economic boom, and we know what policies will lead to economic disaster. The Left denies these obvious truths only because it craves more government power. If America does not wake up to what is happening, there will be much suffering through a long dark night.

Letter to the Editor

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