There will be naturally occurring economic growth this year — but then Obama’s neo-socialist, recovery delaying policies kick in for good and we better hope the rest is just his history.
Americans no longer remember the concept of the “business cycle.” For centuries, market economies have periodically turned down, and then turned back up. The recovery from such downturns is natural for a market economy. Every morning, at least some of the unemployed get up and look for work. Businessmen wake up and spend the day trying to restore their businesses to prosperity. As a result, market economies naturally come back to recovery. This is why the average recession in the U.S. since World War II has been only 10 months, with the longest, until now, being 16 months.
Bad economic policies can throw economies into downturns, and delay recoveries. Keynesian economics and rising effective tax rates produced four worsening inflation/recession cycles in and around the 1970s: 1969-1970, 1973-1974, 1979-1980, and 1982.
But Reaganomics was so successful that it all but abolished the business cycle for a generation. The economy took off at the end of 1982 on a 25-year economic boom interrupted by only two, short, shallow recessions in 1990-1991 and 2001. That is why today we no longer recognize the natural workings of the business cycle.
The current recession was officially scored by the National Bureau of Economic Research (NBER) as starting in December, 2007. It was caused by excessively loose Federal Reserve monetary policy from 2001 to 2006, and the liberal policies creating the subprime mortgage market, resulting in the catastrophic housing bubble.
As previously explained in this column, from the beginning the government tried to address the downturn with long ago failed, counterproductive, Keynesian economics, rather than Reagan’s shockingly successful supply-side economics. First there was the Bush/Pelosi stimulus bill of February, 2008, since forgotten because it had no positive effects.
A year later, President Obama and Congressional Democrats came back with the almost $1 trillion stimulus bill, promising that it would stop unemployment from climbing above 8%. These bills both involved Keynesian economics because they tried to stimulate the economy through higher government deficits and spending. Even the “tax cuts” in those stimulus bills involved tax credits and rebates that effectively are the same as just more government spending, sending out government checks, rather than the tax rate reductions that were the focus of Reaganomics and supply-side theory, which fundamentally change economic incentives. The slow and weak recovery from the recession, which has lasted almost two years (a postwar record), shows yet again the failure of Keynesian economics, continuing a long, unbroken record of failure stretching back to the 1930s.
But the Obama Administration came into office knowing that the economy would ultimately recover as the business cycle turned up naturally, and planned to reap the political credit, enabling still greater leaps of neo-socialism. Internally, they are surprised and miffed that it has taken so long, not understanding that their own, blindly anti-market policies only delayed recovery.
The Plague of Left-Wing Propaganda
A plague of left-wing propagandists from such pustules as the George Soros-funded Center for American Progress are already feverishly at work attempting to obscure these economic realities. On a recent broadcast of the Larry Kudlow Show on CNBC, Art Laffer politely sat through an infantile lecture from Michael Linden, Associate Director for Tax and Budget Policy for the Center, claiming that Laffer had been “long discredited” in his argument that cuts in capital gains tax rates produce higher revenues.
But the truth is that over the past 40 years, every time capital gains tax rates have been cut, revenues have increased, and every time capital gains tax rates have been increased, revenues have declined.
In 1968, a 25% capital gains tax rate generated real capital gains tax revenues of $40.6 billion calculated in 2000 dollars. The capital gains tax rate was then raised 4 times in the next 7 years to 35%. By 1975, at the higher rate, capital gains revenues totaled $19.6 billion in constant 2000 dollars, less than half as much.
In 1978, the capital gains tax rate of 35% yielded $29.9 billion in 2000 dollars. The rate was then cut 3 times to 20% over the next 4 years. By 1986, the new rate, 43% lower than the 1978 rate, raised $92.9 billion in 2000 dollars, about three times as much.
The capital gains rate was raised by 40% the next year, to 28%. Capital gains revenues fell to $56.2 billion that year, and declined all the way to $34.6 billion by 1991.
In 1997, Congress cut the capital gains tax rate from 28% back down to 20%. Despite this almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999. Revenues over the period 1997 to 2000 increased by 84% over the projections before the tax cut.
Finally, Congress cut the capital gains rate from 20% to 15% in 2003. Capital gains revenues doubled from 2003 to 2005, despite this 25% cut in the rate. Revenues increased by $133 billion during the years 2003 to 2006 as compared to pre-tax cut projections.
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