THE END OF PROSPERITY
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.
THE CIRCUS OF OBAMANOMICS
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.
The federal deficit last year clocked in at a record $1.4 trillion. That was an astounding 13 percent of GDP, one-eighth of the entire economy, and this year the defi
cit is expected to be even higher. In comparison, the deficit in the last budget adopted when Congress had Republican majorities was $162 billion, about one-tenth as high as today. Even the deficit for the big-spending final year of Bush’s presidency, pumped up by two years of Democrat congressional majorities, was a third of Obama’s 2009 deficit, or $458.6 billion.
The core problem, of course, is President Obama’s runaway federal spending, which exploded from $3 trillion in 2008 to $4 trillion in 2009, a shocking increase of 33 percent in one year. Obama’s budget busters include increasing federal welfare spending by one-third in just his first two years, with total welfare spending soaring to $1 trillion by 2014 and $10.3 trillion over the next ten years.
Along with that increased spending come higher taxes. Counting the tax hikes for 2011 in the Obama budget, the tax increases in the healthcare takeover, and state income taxes, the average top income tax rate in America will climb to about 52 percent. Our top rate would then be higher than in France, Germany, and Canada. In five Democratic-dominated states—California, New York, New Jersey, Hawaii, and Oregon—the total top tax rate would be higher than in socialist Sweden!
And this has not yet accounted for further tax hikes proposed by either Obama or his Democratic congressional allies. These range from crippling energy taxes (which advocates call “cap and trade”) to a European-style value-added tax (VAT). Both these measures would violate Obama’s campaign pledge not to raise any taxes on anyone making less than $250,000 a year. Then again, Obama already broke that promise when he raised cigarette taxes.
Obama’s high-tax, high-spending approach along with the Fed’s easy money, cheap-dollar policies have weakened the dollar so severely that foreign powers are now openly discussing replacing the dollar as the world’s currency. If that happens, Americans will endure the expense of having to buy another currency in order to buy foreign oil or anything else from overseas. Under those conditions, any further weakness in the dollar will impose even higher costs on us.
These are policies for long-term economic stagnation, and perhaps another, even deeper, recession. If they are not completely replaced with pro-growth alternatives, we will suffer less opportunity, less upward mobility, and a long-term decline in America’s standard of living—in other words, the end of the American Dream.
TOWARD A NEW AMERICAN PROSPERITY
We need a new economic policy to promote a robust economic recovery and a new, long-term economic boom. This requires sweeping change.
First, we should cut corporate taxes. America suffers from the second highest business tax rate in the industrialized world, with a federal rate of 35 percent, and states pushing it close to 40 percent. Much of the rest of the world, ironically, has learned the lessons of Reaganomics. The average corporate tax rate in the European Union has been slashed from 38 percent in 1996 to 24 percent today. Ireland has a corporate tax rate of 12.5 percent, which has caused per capita income to soar from the second lowest in the EU twenty years ago to the second highest today. Our own Treasury Department has said Ireland raises more corporate tax revenue as a percentage of GDP than we do with our much higher rates. Corporate tax rates in India and China, our emerging competitors, are lower as well. We should restore America’s competitiveness in the world by reducing the federal business tax rate to match Ireland’s rate of 12.5 percent.
Second, rather than increase capital gains tax rates by 66 percent as Democrats propose, we should match China’s pro-jobs policies and abolish capital gains taxes altogether, both for individuals and corporations. By effectively double-taxing capital income, the capital gains levy discourages the venture capital that feeds start-ups and creates jobs. That is why fourteen out of thirty OECD countries, plus China, Taiwan, Hong Kong, Singapore, and others, already enjoy zero capital gains taxes.
With these two measures alone, America would become the most desirable country in the world in which to invest and start a business. That means new jobs and new prosperity.
Third, to alleviate the unemployment crisis, we should cut federal payroll taxes by 50 percent for two years, providing powerful, immediate relief to small businesses that create the most jobs. Follow this with a permanent personal account option for that portion of payroll taxes for younger workers, with the personal accounts substituting for an equivalent portion of future retirement benefits. Given historical capital market returns, workers would get much higher benefits than Social Security promises, let alone what it will actually be able to pay in the future. Workers holding these personal accounts should get a guarantee to get at least as much as Social Security promises today. This would provide a continuing gusher of new savings for capital investment, resulting in more jobs and higher wages.
Fourth, instead of reinstating the death tax with a 45 percent rate, as Obama and the Democrats want, we can create hundreds of thousands of new jobs by abolishing the death tax altogether. Taxpayers have already paid considerable taxes on any money saved over their lifetime. Taxing it again at death is abusive and unfair. No one should be required to go to the undertaker and the IRS in the same week. And no one should see their lifetime of hard work, prudent spending, and careful saving confiscated by the government and given to others.
Fifth, we should provide for immediate expensing for 100 percent of new equipment purchases by businesses, stimulating investment in new, productive technologies. Allowing businesses to write off their productive investments in one year will lead to massive investment in new machinery and new technology. It will ensure that American workers have the most modern and productive equipment in the world. It will also lead to a new birth of American manufacturing for machine tools and other expensable items.
Sixth, repudiating the regressive energy tax policies of Obama and the Democrats, we should implement the American Energy Plan discussed in chapter eighteen, which would unleash the private sector to produce low-cost, reliable energy supplies from American sources. This would create millions of new jobs and generate billions in new revenues for federal and state governments.
Seventh, we should repeal the disastrous mark-to-market accounting regulations and replace Sarbanes-Oxley with reasonable accounting requirements. We should also repeal the Community Reinvestment Act that contributed to the financial crisis. While we’re at it, let’s break up Fannie Mae and Freddie Mac and move their smaller successors off government guarantees and into the free market.
Eighth, we need to adopt Reagan-style strong-dollar monetary policies, guaranteeing the dollar remains the world’s reserve currency, ensuring lower interest rates and more long-term capital investment, and averting any resurgence of inflation.
Ninth, analogous to the Reagan budget cuts of 1981, we should immediately cut federal spending by $180 billion. We should then adopt a budget that cuts future federal spending by $1 trillion, as we did in the House in 1995. Terminating TARP and all bailouts and repealing all unspent stimulus funding would be a good start. With these measures and a resultant booming economy, we can and should balance the budget within seven years. We should then make that policy permanent with a balanced budget amendment to the Constitution.
This comprehensive plan would cut unemployment to 3-4 percent and restore long-term economic growth. But we can do more. To generate another lasting economic boom, we need fundamental tax reform, similar to that proposed by Steve Forbes. We should adopt the optional 15 percent flat tax with generous personal exemptions of $12,000 per person. For a family of four, the first $48,000 in income would be tax free. Workers could stick with the current tax code if they prefer, but the new system would allow them to file with just a post-card. We could begin this transformation by cutting the current 25 percent income tax rate paid by the middle class to 15 percent, leaving 90 percent of workers effectively with a flat tax of 15 percent or less.
Finally, we should adopt the entitlement overhaul discussed in chapter fourteen. Personal accounts would be expanded over time to pay for all the benefits now financed by the payroll tax, all
owing us to abolish that tax completely. Fundamental welfare reform based on work would be the single most effective contribution to eliminating poverty in America.
These reforms are not particularly complex, and they won’t require thousand-plus page bills to be rammed through Congress. They are common-sense solutions that replicate policies that have worked, both in America and abroad, and that reject those that have failed.
Just as Reagan ushered in a 25-year economic boom, with the right policies we could launch a new boom lasting till 2035 and beyond.
CHAPTER THIRTEEN
A Small Business Plan by Small Businesses for Small Businesses
With Dan Varroney, COO of American Solutions
Small business is the engine of job growth, creating three out of every four new jobs. And many of the remaining jobs are created by companies that began as small start-ups. So if you want to expand the economy and create jobs, you have to focus on small business.
American prosperity is the cumulative result of the creativity, courage, and leadership of individual men and women. In business, science, and the military, the relentless pursuit of innovative achievement has been the driving force of our success. This is the value of entrepreneurship. It is the spark of energy and purpose that leads individuals to create and manufacture something new and productive. It breaks through barriers, challenges the status quo, and draws upon the strengths of others to achieve results. It is the will to work hard, coupled with the intelligence to work smart. Fundamentally, entrepreneurship is the audacity, perseverance, and competence that turn an individual into a creator, whether of wealth, science, technology, or military success.
To Save America: Abolishing Obama's Socialist State and Restoring Our Unique American Way Page 16