Lincoln * Institute

Ralph R. Reiland

Ralph R. Reiland

The B. Kenneth Simon Professor of Free Enterprise at Robert Morris University

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Reflections

Obama's Economics: Exactly the Wrong Prescription

by Ralph R. Reiland
 

Repeatedly talking down the American economy, Barack Obama, pushing the so-called "stimulus" package, incessantly claimed that we're "going through the worst economic crisis since the Great Depression."

In fact, he was off by four decades. It's the worst economy since Jimmy Carter. Ronald Reagan inherited rates of 13.5 percent inflation and 7.6 percent unemployment from Carter in 1980, a misery index (the inflation rate added to the unemployment rate) of 21.1.

Obama, in contrast, came into office with a January 2009 unemployment rate of 7.6 percent and a zero rate of inflation, a misery index of 7.6 percent, a third of the inflation/unemployment problem that Reagan faced.

Reversing his "hope over fear" campaign slogan, Obama proclaimed that he'd

"inherited the most profound economic emergency since the Great Depression," a

"crisis" that would turn into a "catastrophe," possibly "irreversible," if we didn't hurry up and get on board with his trillion-dollar package of pork, political payoffs and "shovel-ready" government projects, the largest expansion of government in American history.

At last count, the mayor of Las Vegas was seeking $2 million for more neon, Chula Vista, California, wanted a new $500,000 dog park, the mayor of Pittsfield in Maine sought money to patch his "pain in the hiney" potholes, and Shreveport, Louisiana, appealed for eight new Harleys for the cops and six new water slides, all with money to be deducted from our paychecks or borrowed from China.

With Reagan, the solution was the opposite. Seeking to unleash the productivity and job-creating potential of the private sector and reverse the downward slide of Carter's high-inflation, big-government, high-unemployment, slow-growth economy, Reagan's answer was to get government out of the way by way of reductions in government red tape and an across-the-board tax cut that reduced the nation's top income-tax rate from 70 percent to 28 percent.

The result? The worst economy since the Great Depression turned into the largest economic boom in American history, a 20-year surge of investment, entrepreneurial risk-taking and economic growth.

Inflation and unemployment rates of 13.5 percent and 7.6 percent in 1980 dropped, respectively, to 4.1 percent and 5.5 percent by the conclusion of Reagan's presidency in 1988.

Altogether, 19 million jobs were created from 1982 through 1988, more than the total number of jobs created in Europe and Japan combined, producing real (adjusted for inflation) income gains in every income quintile. The poverty population, after expanding by 7 million in the late 1970s, dropped by 4 million in the 1980s.

Explains Stephen Moore, senior economics writer at The Wall Street Journal: "In

1982, the Dow Jones average hit a low of 800. After the final pieces of the Reagan tax cuts were installed, the market rocketed upward for 18 consecutive years. From 800, the Dow rose to 10,000, creating between $15 trillion and $20 trillion in new wealth and industries. The Dow would have to climb to 100,000 by 2020 to match this Herculean performance."

Similarly in the 1960s, President John F. Kennedy presented his prescription for economic growth in a speech in December 1962 before the Economic Club of New York: "It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance the budget, just as it will never produce enough jobs or enough profits… In short, it is paradoxical that tax rates are too high today and tax revenues are too low and the soundest way to raise revenues in the long run is to cut the rates now."

In 1963, Kennedy asked Congress for an across-the-board tax cut that would reduce the top income-tax rate from 91 percent to 65 percent. Subsequently, Congress reduced the top rate to 70 percent. Explains Bruce Bartlett, a White House economist in the Reagan administration: "Once upon a time, in the not-too-distant past, there was a Democratic president who was not obsessed with class warfare, as today's Democrats are."

The result? Unemployment dropped from 5.2 percent in 1964 to 3.8 percent in 1966 and annual tax revenues, with lower rates, jumped 33 percent in real terms, adjusted for inflation, from 1961 to 1968.

What we're getting from Obama is the exact opposite, a program for expanded

government, more regulations, more mandates, and higher tax rates for the nation's key job creators.