By Peter Ferrara on 4.15.09 @ 6:08AM
The fight for economic freedom begins in earnest today.
Congratulations to the hundreds of spontaneous grassroots organizers who have successfully organized the over 300 tea party events that will take place today across the country. Such events have already been widespread, and highly successful, with sudden big crowds: 2,000 in St. Louis, 3,000 in Cincinnati, 6,000 in Orlando, as recently reported by Peter Roff in a Fox News blog.
Because these events are highly decentralized, with no significant institutional organization or funding behind them, they represent a genuine outpouring of grassroots opinion with enormous political importance. For every person out in the streets today, there are undoubtedly many more who didn’t make it who share the same opinions. The bigger the demonstrations today, the bigger the rest of the iceberg under water. Moreover, this movement represents genuine grassroots organization, as names and contact information are collected, and this will be valuable for future political activity.
These people are both against and for something. They are against the left-wing extremism of the current political leadership in Washington, from Barack Obama to Nancy Pelosi, to Barney Frank, to Henry Waxman, and on and on. No wonder Newsweek (soon going out of business) thinks we are a nation of socialists now, as it admitted in a recent cover story.
But even more, the tea party revelers are for a sophisticated vision of economic freedom. They recognize that the more resources the government takes out of the private sector, through taxes, borrowing and spending, the less freedom that average working people have left for the pursuit of happiness. Taxes as a percent of GDP, government spending as a percent of GDP, should be taken as reverse indicators of economic freedom. The higher they are, the less economic freedom people have. The lower they are, the more economic freedom we have. In other words, the more the government takes your money to spend on what it wants, the less freedom you have to choose to spend, or to save and invest, your own money as you want. And visa versa.
Let us review the already gruesome results of the Obama economic policy to see what has the people out in the streets. Obama’s budget for this year increases federal spending by an extremist 34% over the budget adopted for last year, to a total of $4 trillion, the highest ever! Since World War II, going back over 60 years now, federal spending as a percent of GDP has been stable, hovering around 20%. But federal spending for this year under the Obama budget and economic policies will soar to a shocking 28.5%of GDP, an increase in the size of the federal government in Obama’s first year of 42% compared to the postwar average relative to GDP.
Over the longer run, because of exploding federal entitlements, federal spending will soar to 40% to 50% of GDP, depending on how much permanent damage Obama does. With state and local spending, the total will climb towards 60%, and we will no longer be a free country.
The Congressional Budget Office projects Obama’s budget deficit for this year at a shocking $1.845 trillion, the highest ever. That would be more than seven times Reagan’s largest deficit of $221 billion, which caused so much howling among liberals and Democrats. This Obama budget deficit will total an astounding 13.1% of GDP, more than one-eighth of the entire U.S. economy, for the federal deficit alone!
Obama says that this is George Bush’s budget deficit. But it wasn’t George Bush who led adoption of a $1 trillion stimulus package in February, followed by a $410 billion supplemental spending bill the next week, with a $275 billion housing bailout plan proposed the following week, $634 billion as a down payment on a new national health insurance entitlement adopted in the budget, and another $1 trillion bank bailout plan recently announced as well. (Note: The entire economy produces just $14 trillion a year, so $1 trillion is real money.)
Obama said in his national press conference on March 24, “We’re doing everything we can to reduce that deficit.” But do his actions recounted above look like he is “doing everything we can to reduce that deficit”?
The deficit for the last budget adopted when Congress was controlled by Republican majorities, for fiscal 2007, was $162 billion, or 1.2% of GDP. CBO projects that by 2019 under Obama’s budget, the deficit will still be well over $1 trillion.
Finally, under Obama’s budget the national debt will double over the next five years, and triple over the next ten, to $17.3 trillion. The national debt as a percent of GDP will soar from 40% to a peacetime record of 82.4%, almost as large as the entire economy, and twice as high as when Reagan left office. If the economy does not recover permanently next year, as even the CBO assumes (not going to happen long term), Obama could even top the World War II record of national debt at 113% of GDP, spending mostly on welfare and entitlements, rather than on fighting the Nazis and Imperial Japan.
Does this sound like we’re “moving from an era of borrow-and-spend to one where we save and invest,” as Obama also said in his press conference last month?
Is this unfair to Obama, who needed to restore economic growth to a collapsing economy he inherited? After all, as Obama recently laughed, “What do you think a stimulus is?”
Well, ask yourself, will we restore growth through increased welfare, runaway federal spending, and record deficits and debt? Or does growth come from reducing tax rates, unnecessary regulatory burdens, and government spending, and maintaining a strong dollar? That’s what Reagan did, and the result was a 25-year economic boom that spread across the entire planet, with “70 million people a year [worldwide]…joining the middle class,” as Steve Forbes recently observed. What Obama is doing is the opposite of this proven formula, in every detail.
Oh, the economy will “recover” later this year, because it is still a powerful, capitalist economy that tends towards growth. But Obama’s economic policies are taking America back on a long, slow, nostalgia tour to the glorious economy of Jimmy Carter, complete with gas and energy shortages, soaring inflation and interest rates, and persistent unemployment. Over the longer run, that road leads back to the liberal left glory days of the 1930s.
And I haven’t even begun to talk about Obama’s tax increases. By the end of next year, the top income tax rate will have risen by 20%, the top capital gains tax rate by 33%, and the tax on dividends by 33% as well, with the top death tax rate restored to 45%. Obama ran for President promising a tax cut for 95% of Americans, which turned out to be a miserable $400 per worker income tax credit, less than $8 a week, with no incentive effects to promote the economy. That will be more than offset by the $645 billion cap and trade tax Obama has proposed to combat non-existent global warming, which will be paid by everybody through higher prices for gas, electricity, home heating oil, coal, and everything produced with energy. Obviously, these sharp tax increases will trash the economy in the future, not promote growth. Higher energy costs in particular will chase remaining American manufacturing overseas.
All of this is why America will be in the streets today demanding a U-turn from Obama’s road to oblivion, returning to Reagan’s highway to prosperity, which Bush mistakenly exited.
But over the longer run, the tea party revelers are looking for an expanded vista of economic freedom, with less government control, lower taxes, reduced spending and debt, fewer unnecessary regulatory burdens, and sound money free from inflation. How can America achieve that?
Let me offer a few ideas. I am not claiming these as the agenda of today’s tea parties. I am offering them as the best of the ideas that have been developed over recent decades, and the most promising for long-term freedom and prosperity, in the hope that many of those demonstrating today will support them in the future.
Newt Gingrich, who is speaking at the tea party in Atlanta today, has offered a 12-point economic recovery plan based on the principles of President Reagan’s 1981 recovery plan. Gingrich proposes to reduce the 25% income tax rate paid by middle-income earners to 15%, which would effectively establish a flat tax of 15% for close to 90% of Americans. He would also reduce the federal corporate tax rate of 35%, the second highest in the industrialized world, to the 12.5% rate adopted 20 years ago in Ireland, which boosted that traditionally poor country to the second highest income in the EU. Our own Treasury Department says Ireland’s 12.5% rate generates more corporate tax revenue as a percent of GDP than our 35% rate.
Gingrich also proposes to abolish the capital gains tax and the death tax, which both involve double taxation of savings and capital. He would also open up production of domestic U.S. energy across the board, ensuring plentiful, low cost energy supplies for the American economy. These policies would produce another generation-long economic boom.
Rep. Paul Ryan (R-WI) has offered a tax reform plan with just two rates, 10% applying to the first $100,000 in income each year, and 25% applying to all income above that. Generous personal exemptions would eliminate income taxes for a family of four on the first $40,000 earned each year.
For the payroll tax, Ryan has developed and introduced legislation that would allow workers the freedom to choose to save and invest half their Social Security taxes in their own personal accounts. To the extent each worker exercised this option, benefits from the account would replace future promised Social Security benefits on a proportional basis. Because over the long run market investment returns are so much higher than what Social Security can even promise, let alone pay, working people can gain enormously from this option. But Ryan’s bill wisely retains the Social Security safety net, guaranteeing that each worker would still receive at least what they would have been paid in Social Security benefits under current law. So workers can gain, but they can’t lose. Experience shows, however, that few if any workers would fall into that safety net over the long run.
Such personal savings, investment, and insurance accounts should be expanded over the long run to empower workers with the freedom to substitute the accounts for the entire payroll tax, with the accounts providing all of the benefits now financed by the payroll tax. This would produce an enormous reduction in the size of the federal government.
Another good idea is the national sales tax proposal. But the 23% sales tax rate is too high. The sales tax should substitute only for the income tax, not the payroll tax as well. Better to phase out the payroll tax under the personal account proposal above. The sales tax reform also does not need to be completely revenue neutral. It would work better providing a net tax cut. This may allow a sales tax rate of only 14%, particularly considering the boost to economic growth such reform would produce.
Another major reform would involve sending the hundreds of federal welfare programs back to the states based on the model of the highly successful 1996 reform of the old AFDC program. That reform replaced AFDC with a block grant of finite federal funds to each state for their own new, redesigned, welfare program based on work. The result surprised even the advocates of the idea, reducing the number of dependents on the old program by close to 60% nationwide. This same reform should now be extended to Medicaid, Food Stamps, housing subsidies, and the hundreds of other means-tested, federal welfare programs. This would also result in an enormous reduction in the size of the federal government.
The most important Obama initiative to stop now is health-care reform. Adding another huge entitlement program, ultimately the biggest of all, to our nation’s debts will hasten the explosion of big government and the ultimate bankruptcy of our country. Obama’s proposal inevitably involves the same government health-care rationing as in every other country that has adopted such a government-run health care system. That is because once such a system is adopted, there is no other way to control health costs.
Such government health-care rationing means a reduction in the standard of living for average Americans, as they suffer less timely and less effective health care. A huge reduction in America’s standard of living would result as well from Obama’s cap and trade global warming plan, as America must then suffer with less energy costing much more. That means smaller, weaker cars, less driving and other transportation, less consumption of energy-intensive meat and dairy products, colder homes, workplaces and stores in winter, hotter homes, workplaces and stores in summer, and less of everything that uses electricity.
A safety net assuring essential health-care services can be created without a government takeover of the entire health-care system. Broader use of reforms that extend patient power and choice, such as health savings accounts and interstate sales of health insurance, would best control costs.
These reforms and ideas would create a bright future for America of freedom and prosperity. Achieving them requires active, widespread, grassroots support. That is the hope that today’s tea parties across America raise.
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
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