February 17th, 2009 12:59 PM Eastern
By Peter Ferrara
Director, Entitlement and Budget Policy, Institute for Policy Innovation
President Reagan’s
economic recovery plan included four specific components on which he explicitly
campaigned over and over and then implemented once elected.
(FOX News/AP)
These were:
1. Reductions in tax rates
to restore incentives for economic growth. This consisted of, first, a
reduction in the top income tax rate of 70% down to 50%, and then a 25% across
the board reduction in income tax rates for everyone. The 1986 tax reform then
reduced tax rates further, leaving just two rates, 28% and 15%. Reagan also cut
corporate income tax rates and capital gains tax rates
2. Spending Reductions. The reductions included
a $31 billion cut in spending in 1981, close to 5% of the federal budget then,
or the equivalent of about $150 billion in spending cuts for the year in 2008. In constant dollars, non-defense discretionary spending declined by
14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in
constant dollars, this non-defense discretionary spending never returned to its
1981 level for the rest of Reagan’s two terms! By 1988, this spending
was still down 14.4% from its 1981 level in constant dollars. Even with the
Reagan defense buildup, total federal spending declined from a high of 23.5% of
GDP in 1983 to 21.3% in 1988 and 21.2% in 1989. That’s a real reduction in the
size of government relative to the economy of 10%
3. Anti-inflation
monetary policy to restrain money supply growth.
4. Deregulation. Reagan’s deregulation
plan has now saved consumers an estimated $100 billion per year in lower
prices. Reagan’s first executive order, in fact, eliminated price controls on
oil and natural gas. Production soared, and the price of oil declined by over
50%.
The results were
spectacular. These four components produced a 25-year economic boom from 1982
to 2007. In their new book, “The End of Prosperity,” Art Laffer and Steve Moore
call these years “the greatest period of wealth creation in the history of the
planet.” They note that — adjusted for inflation– more wealth and income was
created during this Reagan boom than in any other prior period in
But Barack Obama is doing
exactly the opposite on each of these four points:
–He is still promising
tax rate increases, at least by letting the Bush tax cuts expire.
–He just passed the greatest
increase in government spending in the history of the planet.
–He is promising massive
increases in regulatory burdens, including global warming cap and trade
regulation that would cost the economy another trillion dollars a year.
–The Fed is already
furiously reinflating the money supply, sowing seeds of further havoc in the
future.
Even the Obama tax cuts
do not follow the Reagan economic recovery plan because they are not reductions
in tax rates, which is what drives the incentives that govern the
economy.
A reduction in tax rates
increases incentives by allowing people to keep a higher percentage of what
they earn from productive activity. But Obama’s tax cuts are all based on tax
credits, which do nothing to improve incentives. They are really just the same
as his government spending in terms of their effect on the economy, just like
sending more welfare checks out to everyone.
At AmericanSolutions.com,
former House Speaker Newt Gingrich has proposed an updated version of the
Reagan economic recovery program for today. It includes, among other items, a
reduction in the federal corporate income tax rate from 35% to the 12.5% rate
that over the past 20 years has lifted the standard of living in
Obama keeps saying he is
only interested in what works, not ideology. So why doesn’t he include any of
the above components that have a proven track record of effectiveness? Why is
our president ignoring what works and insisting on embracing an ideology that
will simply expand big government?