Economic History Lessons
- 26 June 2011 by Author 0 Comments
Economic History Lessons
By Richard Larsen
Published – Idaho State Journal, 06/26/11
The old truism that those who fail to learn from history are doomed to repeat it, holds true with principles of economics perhaps even more that other areas. And the consequences of failing to learn from history are felt by all when those who are impervious to, or ignorant of, the laws of economics are our political leaders. Our current crop of political leaders obviously qualifies for that group.
Last week we addressed the high cost of over-regulation and its debilitating impact on economic growth and job creation. The logical sequel to that column would be elucidation of the other factors that exacerbate the nation’s economic doldrums, and stymies economic growth, versus proven policies which, based on empirical data, have grown the economy and created jobs.
To see what policies work to expand the economy, we need look no further back in history than the 1980s. Peter Ferrara, a former policy wonk for the Reagan administration, penned a superb op-ed column for the Wall Street Journal last month, in which he shared some startling data.
When Ronald Reagan took office in 1981, the economy was in bad shape and taking a greater toll on individual Americans than even the financial market collapse of 2008. Unemployment was peaking at 10.8%, and double-digit inflation was eroding the buying power of the dollar dramatically, jumping 25% in just two years from 1979-1980. Consequently, the poverty rate had increased steadily from 1978, climbing an astounding 33% from 11.4% to 15.2% by 1982. Median family income dropped by 10% nationwide.
With a four-pronged approach to the economy, Reagan was determined to cut tax rates, which he did, reducing the top income tax rate of 70% to 50%, and then a 25% reduction for everyone else. Then in 1986 tax rates were reduced further, to just two tax levels, at 28% and 15%.
Secondly, he was able to get congress to reduce government spending a little, including a $31 billion cut in 1981, nearly 5% of the budget at the time. Non-defense discretionary spending was reduced by 16.8% from 1981 to 1983. But after that even Reagan couldn’t control the spending of the Tip O’Neil led congress, as it increased from $746 billion to $1.1 trillion, with defense spending making up $120 billion of that increase. The only positive in this regard was that, with the growing economy, spending was reduced from a high of 23.5% of GDP in 1983, to 21.3% in 1988, representing a 10% reduction, according to Ferrara.
Thirdly, monetary policy under Reagan restrained money growth to maintain the dollar’s strength and curtail the destructive forces of inflation on household purchasing power.
And finally, deregulation during the first term alone saved U.S. consumers more than $100 billion per year in lower prices, further combating inflationary forces in the economy. His first executive order eliminated price controls Carter had implemented on oil and natural gas. The result was soaring production which, coupled with an improving dollar, led to a decline in the price of oil of more than 50%.
The results were remarkable. During the ensuing 92 months of expansion (a U.S. record), the economy grew more than 30%, creating 20 million new jobs, increasing non-farm payrolls by 20%, which reduced unemployment to 5.3% by 1989. Disposable income per capita increased by 18%, increasing the standard of living by nearly 20% in just seven years. And significantly, the poverty rate dropped by nearly 20% from its peak in 1984.
That’s the prescription for success for our struggling economy. And it’s the polar opposite of what’s being done today. The Obama administration is determined to raise taxes on everything and everyone (with only a brief reprieve when congress extended the Bush tax cuts for two years). Government spending growth has nearly doubled the federal debt from $7.8 trillion to over $14.3 trillion in just four years since Pelosi/Reid took over congress. The Fed’s monetary policy has pumped over a trillion dollars into the M2 money supply through Quantitative Easing I and II which has weakened the dollar and contributed to commodity-based inflation, which will inevitably hit consumers. And regulatory expansion has increased government control of nearly everything and is choking the life out of private enterprise, and now costs us (since businesses pass their costs on to consumers) over $960 billion per year, according to the Wall Street Journal.
Our current economic policies are all antithetical to economic expansion. But it takes time for fiscal and monetary policy to fully take effect, which means things will inevitably get worse before they get better. We won’t see the full effects of Obama’s policies until the tax increases of 2013 kick in, and the full costs of the regulatory enactments have hit on the spending side. Reaganomics launched the most rapid, sustainable expansion of the U.S. economy in history. Obamanomics will have the opposite effect unless corrected quickly.
AP award winning columnist Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board. He can be reached at email@example.com.