Special Report

Still Fighting Reaganomics

The Concord Coalition says it's for fiscal responsibility. But what it's really for is to oppose tax and spending cuts.

By 6.4.08

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The Concord Coalition bills itself as an organization dedicated to eliminating Federal budget deficits and restoring "fiscal responsibility." And it certainly does passionately, insistently, and simplistically argue for the elimination of such deficits as the essential foundation for a sound economy and long-term economic growth.

But the odd thing is that if you follow its message more closely, you find another theme popping up over and over. Its people always seem to come back to saying that spending cuts are "unrealistic," or "implausible," or "impractical," or even "draconian."

But if you think balanced budgets are the sine qua non of good economic policy, and believe that spending reductions are not a viable option, where does that leave you? It leaves you with the heart and soul of the Concord Coalition, which is an organization dedicated to promoting tax increases and opposing tax cuts.

That should not be surprising, because the organization grew out of a residue of liberal Republicans and neoliberal Democrats who were in revulsion against what they derisively called Reaganomics, but who were routed politically by the Gipper.

Quite literally, "Reaganomics" was one of the most successful social and economic experiments in world history. Volumes can and have been written on this point. But it can be summarized as follows.

By 1973, virtually every major economic statistic regarding the American economy stopped improving, reflecting economic stagnation. By 1978, every major statistic started turning negative -- poverty, unemployment, wages, family income, inflation, interest rates, and more. But in 1983, when the Reagan tax cuts were phased in, these statistics all turned around and started improving. From 1983 to 1989 inclusive, the economy boomed, adding during that period total economic output equivalent to the entire economy of West Germany, at the time one of the top 5 economies in the world. The best summary of it all can be found in The Seven Fat Years, by the late Robert Bartley, for many years head of the Wall Street Journal editorial page.

This experience followed the enormous success of the Kennedy tax cuts of the early 1960s, which followed the enormous success of the tax cuts engineered by Treasury Secretary Andrew Mellon in the early 1920s.

THE CONCORD COALITION, however, just ignored this astounding success, and doggedly pursued its simple-minded notion that the economy is all about the budget deficit. It applauded the Clinton Administration's tax increases in 1993, which followed the Bush Administration tax increases in the 1990 budget deal. But these tax hikes failed to close the deficit gap, with $200 billion a year deficits still projected into the future indefinitely when the Republicans were elected to Congressional majorities in 1994.

The Concord Coalition opposed the tax cuts on capital adopted by the new Republican majorities, which caused the economy to boom, producing new, unexpected revenues. The deficits were turned around into huge surpluses when Congressional Republicans sharply restrained the growth of government spending for a couple of years in the face of the booming economy's revenue surge. Experience at the state level shows over and over again as well that this is the way to balance a government's budget, cut taxes to spur growth and restrain spending increases. Tax increases that slow the economy and revenue growth never work.

Nevertheless, the Concord Coalition still opposed the Bush tax cuts of 2001 and 2003, which saved the economy from a holdover Clinton era recession, and a sharp downturn threatened in the great uncertainty after 9/11.

Today, the Concord Coalition joins liberal Democrats in favoring the expiration of the Bush tax cuts scheduled under current law for 2010. This is what will happen if the Bush tax cuts are allowed to expire:

--The lowest income taxpayers will suffer a 33% increase in their income tax rate, from 10% to 15%;

--The top marginal income tax rate will increase from 35% to 39.5%;

--The capital gains tax will increase by 33% from 15% to 20%;

--The tax on the dividends received by many seniors will more than double from 15% to as much as 39.5%;

--Taxpayers with children will lose 50% of their child tax credits;

--The Federal death tax will soar back to its original level after phasing out in 2010;

--Married taxpayers will suffer the return of the marriage penalty.

--Federal taxes overall will increase by more than $2 trillion over the following 10 years, the largest tax increase in U.S. history.

The economic policy savants at the Concord Coalition think this will help the economy rather than trash it.

THE ORGANIZATION DERIDES McCain for recognizing the economic devastation such a disastrous tax policy would cause, and supporting the permanent adoption of the Bush tax cuts. It also sharply criticizes the additional tax cuts McCain has proposed for his own economic program, saying, "The centerpiece of Mr. McCain's economic plan is a series of tax cuts that would largely benefit corporations and the wealthy. He is calling for cutting corporate taxes by $100 billion per year."

McCain has proposed cutting the Federal corporate income tax rate from 35% to 25%. The problem McCain recognizes is that America's competitors overseas have been slashing corporate tax rates in recent years. The average corporate tax rate in the European Union has been cut from 38% in 1996 to 24% in 2007. Counting state income taxes, the average American corporate rate is actually 40%.

How is America to compete not only with these countries, but with the emerging giants of India and China, with this crippling tax disability? McCain says, "High tax rates are driving many businesses and jobs overseas -- and, of course, our foreign competitors wouldn't mind if we kept it that way. We're going to get rid of that drag on growth and job creation." But the Concord Coalition vilifies McCain for this sophisticated view, saying, "Mr. McCain's plan would appear to result in the biggest jump in the deficit" as compared to the economic programs of Barack Obama and Hillary Clinton. The Concord Coalition would favor raising taxes on America's corporations even more, to reduce the dreaded demon deficit, tax increases endorsed by Obama and Hillary as well.

Little Ireland has a corporate tax rate of 12.5%. Since adopting that rate 20 years ago, Ireland has soared from the second lowest per capita income in the EU to the second highest. But to the Concord Coalition, this does not compute.

But what may have surprised some is what the Concord Coalition said about McCain's budget plan to cut $160 billion in spending out of a Federal budget now approaching $3 trillion a year. The Wall Street Journal reported,

"The chances of cuts of this magnitude are 'nonexistent,'" said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that promotes fiscal discipline. "There's not a consensus to cut back on the functions of government that much," he said. "Those are very, very deep cuts."

That is some statement for a supposed deficit hawk organization.

BUT IT IS nothing new. For example, when President Bush's 2009 budget proposed a freeze on domestic discretionary spending for 5 years, the Concord Coalition did not support it. Quite to the contrary, when the Senate budget resolution supported by the majority Democrats proposed to increase domestic discretionary spending by $210 billion above the President's proposal over 5 years, and the House budget resolution supported by the majority Democrats proposed to increase such spending by $276 billion above the President's proposal, the Concord Coalition actually defended these spending increases, saying,

Under the President's budget, non-defense discretionary spending would sink to an historic low of 2.8% of GDP by 2013. That compares with 3.7% of GDP in 2007. The President's budget is thus not a realistic standard for comparison.

The Concord Coalition is thus a fraud as a fiscal watchdog or deficit hawk group. What it wants is higher taxes to finance Big Government.

You won't find any statements or studies or reports on the Concord Coalition website listing desirable spending cuts. All you will see is whining about the deficits and tax cuts. The organization does not object to government spending per se of any magnitude.

The Concord Coalition gave no support or credit to the Bush Administration when it proposed a much more modest increase for the State Children's Health Insurance Program (SCHIP) than either the Democrat controlled House or Senate. As long as the Democrats "paid for" their proposed doubling or tripling of spending on the program in some way, the Concord Coalition was completely OK with that. Indeed, the Coalition actually complained about the President's inadequate 25% increase in SCHIP funding, saying "it is not sufficient to maintain coverage for current enrollees" and "800,000 people would lose health insurance without increased funding." In the end, the President's supposedly inadequate proposal was what was adopted for the following year.

Similarly, there was no objection from the Concord Coalition to the $600 billion farm bill boondoggle, again because it was supposedly "paid for." Indeed, there is nothing in anything the Concord Coalition has written that indicates it would have any objection to a communist system with government taking and spending 100% of GDP, as long as the budget is balanced.

TWO WEEKS AGO, Rep. Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, produced a comprehensive reform proposal for the nation's entitlement programs that balanced both Federal taxes and Federal spending at 18.5% of GDP, the modern historical average for the Federal tax burden. The proposal was fully scored as producing this result by the Congressional Budget Office, the Joint Tax Committee, the Social Security Administration, and the Health Care Financing Administration. What an exciting accomplishment.

But apparently balancing the Federal budget at 18.5% of GDP, and eliminating all future deficits, was not good enough for the supposedly deficit hawk Concord Coalition, as not a peep of support or praise for the effort has been heard from the organization. No tax increases, so I guess the effort was no good.

Conservatives and free market advocates have to recognize that the Concord Coalition does not believe in limited government. It is not working for smaller government in any way. That is fine, the organization does not have to be part of the conservative movement if it doesn't want to be. But the rest of us need to recognize that they are not, and not be fooled into working with them or giving them unwarranted credibility when that may not advance our own goals.

Moreover, we need to recognize that their economic analysis is simplistic and wrongheaded. The budget deficit is not the most significant factor for long term economic growth. What matters most is incentives for savings, investment, entrepreneurship, risk taking, and work. That means lower taxes, not higher. The effect of any deficit we are likely to experience is minor compared to these factors.

The Coalition argues that deficits eat up domestic savings, which results in less investment and lower productivity, wages, and prosperity. But the Federal government borrows capital for the deficit in a global market for savings and investment. That borrowing is small compared to the magnitude of these global markets. Incentives are far more important because they can draw in savings and capital from the entire world, swamping the effect of any domestic deficit.

The bottom line is that conservatives and free market advocates should not be looking to the anti-Reagan Concord Coalition for leadership.

Peter Ferrara is Director of Entitlement and Budget Policy for the Institute of Policy Innovation, and General Counsel of the American Civil Rights Union. He served President Reagan in the White House Office of Policy Development. He is a graduate of Harvard College and Harvard Law School.

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About the Author
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.