by Quin Hillyer
In political debates these days, we hear again and again the warning to avoid “the failed policies of the past.” It is therefore important to review some econo-political history to make sure we understand which policies actually failed and which didn’t.
. Not all tax cuts are equal, and it’s true that as rates drop, the economic-growth potential of tax cuts starts to have diminishing returns. Nonetheless, the history is crystal-clear: Cuts in marginal income-tax rates do indeed spur economic growth and job creation. While other factors obviously play into how the overall economy performs, the history of tax-rate cuts is rather conclusive.
John F. Kennedy proposed tax-rate cuts, saying that “a rising tide lifts all boats.” He was right. His proposal passed after he died, and the economy boomed. In 1981, Ronald Reagan pushed through the most famous tax cut in American history. Once it took full effect, the economy blossomed into what the Wall Street Journal called “the seven fat years” – the longest sustained economic growth since the dawn of accurate national statistic-keeping. (Critics also note that Reagan agreed to a tax hike in 1983. Context is important. The “hikes” in 1983 merely eliminated a few of the “special-interest” breaks Reagan never asked for in 1981, but that Congress inserted in order to attract more votes. As the full bulk of the much larger tax cuts was only just beginning to take effect then, the cuts dwarfed the far smaller “hike,” which thus did no damage.)
In 1997, President Bill Clinton finally broke down and signed a capital-gains tax cut long advocated by many Republicans; again, the economy took off like a rocket. In 2001, President G.W. Bush signed a set of tax cuts that didn’t kick in until 2003; it immediately ended a mini-recession caused when the “tech bubble” burst, and when combined with investment-tax cuts signed in 2003, it helped spur another huge economic boom. For some reason, people forget that in 2005 and 2006, the economy was firing on all cylinders. (In fact, the unemployment rate stood at a wonderfully low 4.7 percent as late as September of 2007.)
On the other hand, when the elder George Bush caved in and signed a bill raising taxes in 1990, and then when Bill Clinton raised taxes again in 1993, the economy slowed both times. That’s why the first two years of the Clinton presidency featured significant economic doldrums. Higher taxes hurt.
As with tax rates, regulations also were rolled back during the Reagan years. The economy, as we already have noted, boomed.
Today’s ultra-liberals like to claim that “deregulation” somehow caused the financial crisis that fully hit in 2008 and from which the nation is still struggling to recover. Oddly, they never say which regulations supposedly were eliminated, or blocked. The simple truth is that during the preceding decade, regulations grew across the board, with the number of pages in the Federal Register reaching an all-time record of 79,435 in 2008. In other words, the accusation that radical deregulation caused the crisis was not only wrong, but exactly backwards.
That said, there were two areas where regulations were needed, but were blocked or rolled back – not blocked by conservatives, but by liberals themselves. The first came when President Bill Clinton signed a bill overturning the longstanding “Glass-Steagall Act” that kept banks out of insurance and extravagant investment trading. Bad idea. The second occurred when Clinton’s Treasury Secretary, Robert Rubin, led the charge to block new regulations on derivatives and credit default swaps – the exotic financial instruments that, when abused, did so much to cause the crisis.
On the flip side, the Bush administration was correct to try to reform regulations that gave the quasi-governmental Fannie Mae and Freddie Mac free hands to push lending institutions into multitudinous risky mortgages. Liberals blocked the Bush reform efforts as Clinton’s appointees raked in multiple millions of dollars in bonuses – and the nation suffered when millions of families couldn’t pay for those risky mortgages Fannie and Freddie should never have allowed in the first place. Mortgage defaults did more than anything else to bring down the whole house of cards.
The record shows government spending doesn’t boost the economy. Under Democratic then-Speaker Nancy Pelosi, Congress pushed through a stimulus in early 2008. The economy got worse. The far larger, $800-billion-plus super-stimulus followed in early 2009, promising “shovel ready jobs,” but nearly four years later the unemployment rate is no lower and the number of people who left the labor force altogether has skyrocketed.
Indeed, historians are hard-pressed to show any time in American history when major domestic-discretionary spending growth actually generated a stronger economy. But when Reagan cut discretionary spending in the 1980s, combined with his tax cuts, the economy did superbly. When the Newt Gingrich Congress passed major spending cuts in 1995-96, the economy again boomed.
Overall, the record is clear: The recipe for a strong economy is: 1) low and simple taxes; 2) fewer invasive regulations; and 3) a limited government with lower spending and balanced budgets.
Let’s hope lawmakers re-learn those lessons.
About the Contributor
Quin Hillyer is a Senior Fellow for The Center for Individual Freedom, a Senior Editor for the American Spectator magazine, and a Writer-in-Residence at the University of Mobile. He has won mainstream awards for journalistic excellence at the local, state, regional and national levels. He has been published professionally in well over 50 publications, including the Wall Street Journal, the Washington Post, the Houston Chronicle, the San Francisco Chronicle, Investors Business Daily, National Review, the Weekly Standard, Human Events, and The New Republic Online. He is a former editorial writer and columnist for the Washington Times, the Washington Examiner, the Mobile Register, and the Arkansas Democrat-Gazette, and a former Managing Editor of Gambit Weekly in New Orleans. He has appeared dozens of times as a television analyst in Washington DC, Alabama, Arkansas, and Louisiana, and as a guest many hundreds of times on national and local radio shows.