This should be the central argument and theme for this fall’s elections.
(Page 2 of 3)
The Bretton Woods global monetary regime agreed to in 1944 essentially took Mellon’s monetary policy focus on stable prices worldwide. The dollar was convertible to gold at $35, and all other currencies were convertible to the dollar at fixed exchange rates. As long as that was maintained, prices would be stable, as they were until overly expansive U.S. monetary policy caused the system to break down completely in 1971. Bretton Woods also essentially nullified Keynesian stimulus policies, as sustained high deficits for any country were inconsistent with the fixed exchange rates and dollar gold convertibility.
This price stability augured a 25-year, postwar, worldwide economic boom. Domitrovic writes, “There can be no mistake that in the high years of the Bretton Woods system, roughly 1950-70, the world economy established incredible feats. European and Japanese growth was sustained at a nearly 7% rate, and the United States (which had started at a higher basis) enjoyed long booms over 4%.” Supply-side, free market, policies produced in particular the postwar German “economic miracle.”
Kennedy’s Supply-Side Economics
But with recessions in 1953, 1957, and 1960, a true economic boom was not restored in America until the Kennedy tax cuts of the 1960s. Kennedy was surrounded by Keynesians who were willing to support some tax cuts focused on stimulating demand. But President Kennedy himself had a supply-side understanding focused on tax rates, saying, “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 enough profits.”
Domitrovic explains that in 1958 a young Robert Mundell, destined to win the Nobel Prize in 1999, first began to explicitly advocate the supply-side policy mix, first from his perch at the IMF, then as a Professor of Economics at the University of Chicago. Domitrovic quotes Mundell as explaining that President Kennedy overruled his Keynesian advisors and “reversed the policy mix to that of tax cuts to spur growth in combination with tight money to protect the balance of payments,” the exact supply-side agenda Mundell had been advocating, though Mundell disclaims having influenced Kennedy directly. Mundell continues, “The result was the longest expansion ever [up to that time] in the history of the U.S. economy, unmatched until the Reagan expansion of the 1980s.”
Kennedy’s business tax cuts were adopted in 1962, and the personal rate cuts in 1964. The top income tax rate was slashed from 91% to 70%, with the lower rates reduced by similar proportions across the board. The next year, economic growth soared by 50%, and income tax revenues increased by 41%! By 1966, unemployment had fallen to its lowest peacetime level in almost 40 years. U.S. News and World Report exclaimed, “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.” Arthur Okun, the administration’s chief economic advisor, estimated that the tax cuts expanded the economy in just two years by 10% above where it would have been.
The 1970s: Return to Keynesian Fallacies
The postwar boom ended as the liberal Johnson Administration abandoned the hugely successful supply-side policy mix. Federal spending started to soar in 1965, and President Johnson demanded and got a loose monetary policy focused on supposedly maintaining growth rather than stable prices. The tax increases started in 1968 with the 10% income tax surcharge, the alternative minimum tax, and increased capital gains levies, followed by bracket creep once inflation kicked in.
By 1969, 6.2% inflation resulted, along with the 1969-70 recession, and the economic miracle of stagflation had arrived, supposedly impossible under the doctrine of Keynesian economics. For the rest of the decade, Keynesian monetary policy kept trying to boost the economy out of decline, only to have to reverse course when inflation soared, causing the economy to fall into recession again. This resulted in further recessions in 1973-75, 1980, and 1981-82.
It finally came to an end when President Reagan explicitly abandoned Keynesian economics, and openly embraced the supply-side. He adopted 25% across the board income tax rate cuts, and then tax reform in 1986 that reduced the top rate from 70% in 1981 to 28%, with only one other rate of 15%. He bravely endorsed tight money through the teeth of the recession to stop inflation, which worked spectacularly. While prices rose 25% in just two years from 1979-80, annual inflation collapsed by half to 6.2% by 1982, and half again to 3.2% by 1983.
Reagan added deregulation to the policy mix, which reduced the cost burden on production, further stimulating it. The Reaganomics formula also included domestic spending cuts, which even with the defense buildup that won the Cold War without firing a shot, reduced total federal spending as a percent of GDP by 10% by 1989.
The results were so spectacular they astonished and surprised everyone, from opponents who wouldn’t admit it, to the architects of Reaganomics themselves. Besides slaying inflation which most thought by then couldn’t be done without destroying the economy, by the end of 1982 the economy took off on the above mentioned, 25-year economic boom, what Reaganomics gurus Art Laffer and Steve Moore have rightly called “the greatest period of wealth creation in the history of the planet.” These results have been recounted in this column several times in the past, and the complete story is too long to do it further justice here.
The Bush/Obama Great Recession
What needs to be recounted at this point is that the Great Reagan Boom ended when, again, the supply-side policy mix was abandoned. Soon after Bush was elected, the Fed returned to using monetary policy to stimulate and manage the economy rather than focusing on price stability. The loose monetary policy from 2001 to 2006 even kept real interest rates below zero for 2½ years during that period, which effectively subsidized excessive risk and leveraging. The result was the housing bubble, which created the financial crisis when it popped in 2008.
Equally promoting the bubble was the Clinton Administration/liberal Democrat “affordable housing” policies, creating the subprime mortgage market. Fannie Mae and Freddie Mac were dragooned to finance the bubble to its eventual scary dimensions. Reregulation forced banks to contribute more financing to subprime mortgages and the housing bubble as well, and further contributed to the crisis with mandatory mark to market accounting, and privileged status for the credit rating agencies that rated subprime mortgage backed securities AAA.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?