To Save America: Stopping Obama's Secular-Socialist Machine (20 page)

The 25-year boom was fueled by the tax cuts and other pro-growth policies adopted by the Republican congressional majorities in the 1990s, when I served as Speaker of the House. Indeed, the House passed a budget resolution in 1995 that would have cut federal spending by $1 trillion over ten years—and that was when $1 trillion was a lot of money. The full Congress did not implement all those cuts, but it did significantly reign in spending. This shows what can be accomplished by a change in political leadership.

Total federal discretionary spending, as well as the subcategory of non-defense discretionary spending, declined from 1995 to 1996 in actual nominal dollars. In constant dollars, adjusted for inflation, the decline was 5.4 percent. By 2000, total federal discretionary spending was still about the same as it was in 1995 in constant dollars. As a percentage of GDP, federal discretionary spending was slashed by 17.5 percent in just four years, from 1995 to 1999. Total federal spending relative to GDP declined from 1995 to 2000 by an
astounding 12.5 percent, a reduction in the federal government relative to the economy of about one-eighth in just five years.

As a result, $200 billion annual federal deficits, which had prevailed for over fifteen years, became surpluses by 1998, peaking at a $236 billion surplus in 2000.

The much maligned Bush tax cuts of 2001 and 2003 also contributed to the 25-year boom. Restoring growth, they reversed the short, shallow 2001 recession and the economic damage of the 9/11 attacks. These cuts reduced the top income tax rate by 11 percent, the bottom income tax rate by 33 percent, the capital gains tax rate by 33 percent, and the dividends tax rate by 50 percent. After these rate cuts were fully implemented in 2003, the economy created 7.8 million new jobs, and the unemployment rate fell from over 6 percent to 4.4 percent. Real economic growth over the next three years doubled from the average for the prior three years, to 3.5 percent. Business investment spending, which had declined for nine straight quarters, reversed, increasing 6.7 percent per quarter. Manufacturing output soared to its highest level in twenty years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled.

By 2006, capital gains tax revenues had doubled, despite—or, as we argue, because of—the 25 percent rate cut. In fact, over the past forty years, capital gains tax revenues have increased every time the capital gains tax rate has been cut, and revenues have fallen every time the rate has increased.

As Laffer and Moore noted in 2008, “The economy in real terms is almost twice as large today as it was in the late 1970s.” Moreover,

The authors also note, “A poor family in 1979 was more likely to be rich by the early 1990s than to still be poor.” They cite a Congressional Budget Office (CBO) study, backed up by a later Treasury Department study, finding that “from 1994 to 2004 Americans in the bottom 20 percent of income actually had the highest increase in incomes.” They continue,

Or, as Nobel Prize winning economic historian Robert Fogel wrote in 2004, “In every measure that we have bearing on the standard of living . . . the gains of the lower classes have been far greater than those experienced by the population as a whole.” Under Reaganomics, the rich got richer and the poor got richer too.

Reagan was not the first to jumpstart the economy through sweeping tax cuts. It has happened four or five times in the last century with virtually the same result every time. One of these instances occurred under President Kennedy, who cut the top tax rate from 91 percent to 70 percent, with across the board rate cuts of 15 to 30 percent for the other tax brackets. Compared to national income and the total budget, the Kennedy tax cut was three times larger than the Bush tax cut, which only reduced the top tax rate by
a measly 4.6 percentage points, from 39.6 percent to 35 percent. As Kennedy declared,

A true supply-side tax cutter, Kennedy insisted tax cuts actually increase tax revenues, an argument the Left deny with religious intensity. Kennedy stated,

In response to the Kennedy tax cuts, the economy grew by 10 percent in just two years, with the annual economic growth rate increasing 50 percent. More than 1 million jobs were created in the following four years, and unemployment fell to its lowest peacetime level in more than thirty years. Federal income tax revenues grew by 41 percent during those four years, causing
U.S News & World Report
to observe, “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.”

The 25-year boom ended because over the last eight years we abandoned every one of the planks of Reaganomics. One of the most harmful changes was ending Reagan’s strong dollar monetary policies, as the Fed pursued overly-expansive policies from 2001 to 2006, including two and a half years with a
negative
real federal funds rate, during a time when the economy was still growing.
³
This was the central cause of the housing bubble that burst in 2007-2008, sparking the financial crisis.

Even before that, the Clinton administration, supported by congressional liberals, had adopted damaging “affordable housing” policies, first by strengthening the Community Reinvestment Act, and then via discrimination lawsuits filed by HUD and the Justice Department against banks accused of denying loans to low-income borrowers. These policies, reinforced by banking regulators, produced lower mortgage lending standards that set the stage for the subprime mortgage market meltdown. The interventions of the politically connected Fannie Mae and Freddie Mac, both guaranteed by government, exacerbated the problem by spreading trillions in toxic mortgage-backed securities throughout the U.S. and world financial systems. These policies began the housing bubble even before the Fed’s miscalculations early in the Bush administration.

Other regulations contributed to the crisis as well. For example, mark-to-market accounting regulations forced financial institutions to list many sound mortgages on their balance sheet as worthless purely due to panic selling by other institutions. As these firms’ balance sheets began showing artificial insolvency or near insolvency, their creditors cut them off, they lost all liquidity, and their stock price plunged—all this even though the firms’ underlying business was often perfectly viable. This is how, with more than 90 percent of mortgages still paying on time, financial giants like Merrill Lynch, Bear Stearns, AIG, and Lehman Brothers went bankrupt almost overnight. These companies
may well have survived under the “historical cost accounting” rules followed for decades before the advent of mark-to-market.

Additionally, the Sarbanes-Oxley Act of 2002 crippled small firms, killed millions of jobs, lengthened by years the time it took to bring a new company to market, and drove competent people off boards by increasing the risk of serving. The act’s destructive regulations created an anti-business environment that degraded what had been the world’s greatest system for creative, entrepreneurial start-ups. As Home Depot co-founder Bernie Marcus asserts, Home Depot could not have been created in today’s regulatory environment.

President Bush and Congress also lost control of federal spending. When the financial crisis set in at the end of 2007, Bush and congressional Democrats rejected Reaganite supply-side tax rate cuts, instead opting for outdated, Keynesian-style tax rebates or cash grants. Speaker Pelosi, Majority Leader Reid, and their socialist allies stopped all attempts at pro-growth, pro-entrepreneur tax rate changes and regulatory reform. Many Republicans were complicit as the government sought to boost the economy by increasing government spending—a tried and true recipe for failure.

In 2008, the American people thought they were electing a young, forward-looking president to lead us into the future. He has proven instead to be a backward-looking ideologue wedded to failed ideas from the last century and even earlier.

A believer in Keynesian economics, then-Senator Obama vociferously supported the February 2008 Pelosi-Bush stimulus bill, which wasted $168 billion with no apparent economic benefits. Refusing to learn from his mistakes, President Obama advocated another stimulus bill in February 2009 that failed just like the previous stimulus did, but wasted more than four times as much money in the process.

The Left like these stimulus bills because they get to use big government to allocate massive sums of money to their favorite projects and interest groups. But this approach never improves the economy, because the underlying Keynesian economics are wrong. Runaway government spending, record deficits, unsustainable federal debt, and hundreds of billions in increased welfare spending will not renew the economic boom. Trickle-down bureaucracy does not create wealth. Obama’s stimulus simply borrowed close to $1 trillion from the private economy to pour a trillion back in through increased government spending, producing no net economic gain.

This policy has failed time and again. The economy grows not through ever-greater spending, but through policies that increase incentives for savings, investment, work, creating new jobs, starting and expanding businesses, and entrepreneurship.

Pro-growth, pro-jobs policies, however, do not fit the Left’s secular-socialist ideology. Obama touts the “tax cuts” in his stimulus bill, but those were tax credits that do not cut tax rates and, therefore, do not change the fundamental incentives that govern the economy. Indeed, Obama’s own budget documents showed 35 percent of his supposed income tax cuts went to people who do not pay income taxes, meaning they were not tax cuts but welfare checks. This is why Obama’s own budget accounted for this portion of his “tax cuts” as outlays rather than revenue reductions. Moreover, the centerpiece of that “tax cut” plan was a $400-per-worker tax credit that was supposed to fulfill his campaign promise to cut taxes for 95 percent of Americans. That credit, however, is slated to expire next year.

Obama’s policies significantly delayed the incipient economic rebound we finally see today. The recession officially began in December 2007, according to the National Bureau of Economic Research. The average recession since World War II has lasted ten months, with the longest spanning sixteen months. But the Bush-Obama recession lasted almost
two years
thanks to the outdated
Keynesian policies adopted by both presidents. As it turns out, contrary to President Bush’s declaration, abandoning free-market principles doesn’t help save the free market.

Moreover, the weak rebound violates a historical rule: the deeper the recession the stronger the recovery. Based on the severity of the past recession, real growth over 2010 should be 6-8 percent. Indeed, the major tax increases slated for 2011 should be causing even more rapid growth this year, as income is moved forward to avoid the coming tax hikes.

Instead, unemployment stands near 10 percent, with more than 15 million Americans now out of work and Depression-level rates for African-Americans, Hispanics, and younger Americans. Accounting for more than 9 million Americans who were involuntarily working part-time, and an additional 2 million who wanted and were available for work, we get a figure of nearly 27 million unemployed or underemployed, which amounts to a total effective unemployment rate of 17.5 percent. When the final data on wages and family income come out, they will show economic devastation for working people across the board.

The media insist America would be mired in another Great Depression but for the grace of President Obama. The tentative recovery, however, is really attributable to the economy’s natural resiliency. Most Americans don’t even remember the business cycle anymore because Reaganomics virtually eliminated it. But as the term
cycle
suggests, the economy naturally expands and contracts.

In the end, not only have President Obama’s policies failed to spark a robust recovery, they are also undermining our entire economic future. Under Obama’s budget policies, CBO projects the national debt will triple over the next ten years to $17.3 trillion, with the debt as a percentage of GDP soaring from 40 percent today to a shocking 82.4 percent, twice what it was when Reagan left office. By 2011, we will carry the burden of the seventh highest government
debt-to-GDP ratio in the world, in the company of such economic powerhouses as Zimbabwe, Jamaica, and Lebanon.

The Government Accountability Office (GAO) projects that under current policies, federal debt will climb to almost 300 percent of GDP by 2040. Even during World War II, the national debt peaked at 113 percent of GDP. At least in return for that debt we vanquished Nazi Germany, Fascist Italy, and Imperial Japan.