This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published September 26, 2012 on The American Spectator website.
All the Republicans are offering, President Obama tells us over and over, are the same old, failed policies that got us into this mess in the first place. At the Democrat convention, Obama told us about the Republican economic plan, “all they have to offer is the same prescription they’ve had for the last thirty years.”
And who was President 30 years ago? That would be Ronald Wilson Reagan. So you see, Obama is attacking not just the Bush but the Reagan tax rate cuts as well, the 25% across the board rate cuts for everyone known at the time as Kemp-Roth.
The American people lived through this most successful economic experiment in world history. But Obama is betting the American people don’t know what they lived through in this recent history. Most of us, in fact, were not adults 30 years ago, so maybe Obama is right, the American people of today have no idea what happened 30 years ago. Obama is telling them today that it has been one long period of decline. And no one, not even the conservatives or the supply-siders, is taking him on directly. As a result, this has been a cutting, effective argument for Obama in this campaign.
Ancient History: Jimmy Carter and the 1970s
By 1981, when Reagan entered office, America was suffering its third year of double digit inflation, after a decade of accelerating inflation. Double digit interest rates too, with double digit unemployment on its way the very next year, in the fourth recession since 1969.
How did that happen? Following the exact same policies as Obamanomics, the true failed policies of the past. That involved high marginal tax rates tearing the economy down into recession, the Fed printing up money to get America out of those recessions, and then the Fed having to tighten to stop the resulting booming inflation (wait till next year if Obama wins to see that again).
Reagan explicitly countered that with the exact opposite of Obamanomics — tight money at the Fed, slashed marginal tax rates, deregulation to reduce the cost burden on production, in particular unleashing the private sector to maximize energy production, and budget cuts. (Spare me the disembodied fairy tales about how the tight money was all the doing of the Carter appointed Fed chairman Paul Volcker. Volcker would have been run out of town by the Democrats without Reagan’s support and political cover when his policies produced double digit unemployment to go with his double digit interest rates.)
The liberal, Keynesian, economics establishment ridiculed Reaganomics. One Ivy League Nobel prize winner compared it to a train with locomotives at either end pointing in opposite directions, and an engineer expecting the train to arrive at one designated location at the expected time.
But the results were spectacular and historic. The Reagan recovery started in November, 1982, lasting 92 months without a recession until July, 1990. (The tax increases of the 1990 budget deal killed it.) This set a new record for the longest peacetime expansion ever, the previous high being 58 months.
During this 7-year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy. In 1984 alone, real economic growth boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%. Unemployment fell to 5.3% by 1989. The double digit inflation was cut in half by 1982, and in half again by 1983, with inflation not heard from again for a generation.
Real per capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20% in just 7 years. The Carter decline in income for the bottom 20% of income earners was reversed, with average real household income for this group rising by 12.2% from 1983 to 1989. The poverty rate, which had started increasing during the Carter years, declined every year from 1984 to 1989, dropping by one-sixth from its peak.
With the tax rate cuts led by Gingrich in the 1990s, and by George Bush in 2003, this boom continued for 25 years, as recognized even by the establishment National Bureau of Economic Research. Art Laffer and Steve Moore, in their 2009 book, The End of Prosperity, rightly called it “the greatest period of wealth creation in the history of the planet.” Henry R. Nau recounted in the Wall Street Journal on January 26, “the U.S. grew by more than 3% per year [in real terms] from 1980 to 2007, and created more than 50 million new jobs, massively expanding a middle class of working women, African-Americans and legal as well as illegal immigrants. Per capita income increased by 65%, and household income went up substantially in all income categories.”
As Steve Forbes summarized in Forbes magazine in 2008:
Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy. Even in recent years the much maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy.
In other words, the growth in the U.S. economy from 2002 to 2007 was the equivalent of adding the entire economy of China to the U.S. economy.
The brave supply-siders that engineered this historic American turnaround have never been sufficiently beatified for their historic courage in taking on and then whipping the hell out of the economic establishment of the time. Maybe President Romney will hand out some appropriate awards. The liberal Keynesians at the time never got the good whipping their costly foolishness so richly deserved either. Hence, Paul Krugman today, and so much yet to do.
Economics for Dummies
But no, according to our Marxist infiltrator President, it was the tax rate cuts going all the way back to Reagan, and, of course, the diabolical George Bush, that produced the financial crisis, and the Great Recession (“the mess we are in”). This is so silly because there is no economic theory under which tax rate cuts cause recessions. Under Keynesian economics, tax rate cuts are stimulative and expansionary. Even Karl Marx never said tax rate cuts cause economic downturns.
Quite to the contrary, tax rate cuts expand the incentives for increased production, by increasing what producers can keep out of what they produce. So they unambiguously increase production, economic growth, jobs, wages, incomes, and prosperity.
Bush cut tax rates across the board for everyone starting in 2001. He also cut the capital gains rate by 25%, and the tax on dividends by more than half. These rate cuts quickly ended the 2001 recession, despite the contractionary economic impacts of 9/11, and the economy continued to grow for another 73 months. After the rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs and the unemployment rate fell from over 6% to 4.4%, a level we will never see again as long as any Democrats remain in power in Washington.
In response to the rate cuts, business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. That is where the jobs came from. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. Capital gains tax revenues had doubled by 2005, despite the 25% rate cut!
Obama and his minions, echoed by the Democrat party-controlled press, also blame deregulation for the financial crisis. They claim it was the bipartisan repeal of Glass-Steagall, proudly signed by President Clinton in 1999, that contributed to the financial crisis. Glass-Steagall separated commercial banks, which take government insured deposits and make loans to businesses and consumers, from investment banks, which were never allowed to take government insured deposits, and specialize in issuing and marketing securities.
This is again quite silly, because the repeal of Glass-Steagall only eased the financial crisis and in no way contributed to it. Because of the repeal of Glass-Steagall, commercial bank holding companies were able to buy out investment banks that would have failed otherwise. The big failures of the financial crisis were investment banks, like Lehman Brothers and Bear Stearns, who did not fail because they had engaged in commercial banking activities, but because government policies turned the traditional investment banking activities they had always pursued sour (see below).
Moreover, no commercial banks failed because they were engaged in investment banking activities. Commercial banks had always been able to make mortgages, and even buy mortgage-backed securities as an investment. Indeed, under the repeal of Glass-Steagall, no financial institution was able to use government insured deposits to engage in investment banking activities. The repeal only allowed a third corporation, a bank holding company, to own both a commercial bank and an investment bank. But commercial banking activities were still separated from investment banking activities into separate corporations.
Glass-Steagall was repealed because so many exceptions had already been made to it to enable American banks to compete with European and Japanese universal banks that had always been allowed to mix commercial and investment banking activities within the same institution. As a result, the original Glass-Steagall regulation was no longer even practically effective. But as little sense as the charge that deregulation caused the financial crisis makes, the Democrat party-controlled media has perpetuated the falsehood.
The Real Causes of the Financial Crisis
Bill Clinton, who repeated at the Democrat Convention that the Republicans “want to go back to the same old policies that got us into trouble in the first place,” was actually there at Ground Zero for the policies that got us into trouble in the first place. That would be the vast overregulation of his 1995 “National Home Ownership Strategy,” which included more than 100 specific regulatory actions to force banks to abandon their traditional lending standards and create the subprime mortgage market. That not only included a vastly beefed up Community Reinvestment Act. It also included actual or threatened discrimination suits by Justice and HUD to enforce regulatory mandates. It also included regulatory mandates on Fannie Mae and Freddie Mac to finance trillions in mortgage securities backed by subprime mortgages. All this, Clinton brilliantly said, would not cost taxpayers one penny, because the free goodies would be distributed by regulatory decree.
But, of course, this ended up costing Americans trillions as the trashed lending standards spread throughout the mortgage market, including for higher income borrowers speculating in second and third homes. (Once the lending standards were trashed for those with the lowest incomes and weakest credit, they couldn’t be denied to those who were more creditworthy.) All that extra mortgage money flowing into housing gave birth to the housing bubble.
The government-sponsored enterprises Fannie Mae and Freddie Mac were able to attract trillions in additional financing from the market because their securities were recognized as effectively government guaranteed. That pumped up the housing bubble further.
But it wasn’t all Bill Clinton’s folly. George Bush contributed too. Instead of Reagan’s strong dollar monetary policies that slew inflation, Bush’s weak minded Treasury Secretaries supported weak dollar monetary policies with even negative real interest rates for years, and Bernanke was already at the Fed in those years promoting that monetary deconstruction. That pumped trillions more into housing and other overconstruction, as cheap money and record low interest rates promoted overinvestment in the longest term alternatives. That only further pumped up the housing bubble.
Once the housing bubble inevitably burst in 2007, because it grew beyond what could be further supported, all these chickens came home to roost in 2008. Mortgage-backed securities comprised of toxic subprime loans had been spread throughout the world financial community by Fannie Mae and Freddie Mac. Major investment banks overinvested in those securities, further misled by negative real interest rates into massive overleveraging, went bust. The American people lost trillions in home equity, stocks, bonds, 401(k)s, lost jobs, and declining real wages and incomes.
These were the real causes of the financial crisis, not Reagan’s or Bush’s tax rate cuts, or deregulation. But because of Obama’s dishonesty, and the mendacity of the Democrat party-controlled media, the truth has been obscured from the American people.
And the truth is that all these policies are still with us today. Obama’s Justice Department and HUD are still pursuing discrimination lawsuits claiming that any lending standards that deny more loans to minorities and other low income Americans, regardless of creditworthiness, are civil rights violations. The Fed, cheered on by the Obama Administration, is still recklessly printing money with record low interest rates. And federal bailouts have been institutionalized rather than ended in Obama’s Dodd-Frank legislation. This is all laying the foundation for the next financial crisis.
Sunlight on the Horizon
Bill Clinton threw more sawdust into the eyes of the American people at the Democrat convention, when he said, “No President — not me or any of my predecessors — could have repaired all the damage in just four years.”
The truth is that economic recovery is long overdue. Since the Great Depression, and before this latest spooky downturn, recessions in America have lasted an average of 10 months, with the longest previously being 16 months. But we are now 57 months after the last recession started, and still there is no real recovery. They can’t say that is because the recession was so bad, because the American historical experience is the worse the recession the stronger the recovery. Based on this experience, we should be in the third year of a booming economic recovery by now.
Sure Obama apologists have tried to argue based on experience in Third World countries going back as far as 800 years that this time is different because this was a “financial crisis.” But that has not been the American experience, which has been as described above. Moreover, every recession involves some form of financial crisis.
This is why the truth is that a raging economic recovery boom will begin the day Obama is defeated, and the death pall of outdated, braindead Marxism is removed from the face of America.