September 2011

How to Restore the Economy with Sound Economic Principles

By John Hendrickson

In a recent editorial The Washington Times wrote that President Barack Obama’s administration has made history by presiding over the first-ever downgrade in the U.S. credit rating.”[1] The downgrade in the credit rating of the United States comes after the recent debt ceiling compromise, which raised the debt by $2.4 trillion, while only cutting $900 billion and charging a joint-Congressional committee with the task of finding $1.5 trillion in additional cuts. The debt compromise not only failed to seriously address the national debt, which is over $14 trillion, but it also failed to reduce spending and reform entitlement programs. In addition the federal government continues to operate without a budget. As The Washington Times wrote, the Administration “immediately demonstrated its utter lack of creditworthiness by blowing 60 percent of the initial $400 billion increase in one day, the largest single-day accumulation of debt in U.S. history.”[2]

Clearly the federal government is facing a severe spending problem, and even with the debt limit ceiling compromise, the markets and businesses are still reacting with great uncertainty. The President and the Democrats are still placing the blame on President George W. Bush for the lack of recovery and they are arguing that any recovery will take a long time. In the meantime, they declare that more demand-style Keynesian policies are needed to force the economy into recovery. The fact remains that the Administration’s policies have failed and even are making the situation worse. In addition President Obama and the Democrats have dangerously accelerated federal spending even beyond the Bush fiscal record. The Washington Times stated that:

The White House blames the George W. Bush administration for every economic woe, but the numbers speak for themselves. In 2008, the federal budget deficit was around three percent of gross domestic product. In 2011, it’s around 11 percent. Total federal debt was $10.7 trillion at the end of 2008 and is currently $14.6 trillion. Debt as a percentage of GDP was a painful 69 percent at the end of the Bush years, but Mr. Obama is pushing it over 100 percent, another disgraceful historic milestone. A record 45.8 million are on food stamps, and the percentage of working-aged Americans who have jobs is the lowest in three decades.[3]

The current policies are not working and the consequences of these policies are being reflected in the trend in high unemployment and uncertainty in the marketplace. The increase in regulatory activity, the Patient Protection and Affordable Care Act, and stimulus spending have caused more harm in the economy. Although President Obama agreed to renewing the Bush tax cuts and is calling for additional tax reduction, his rhetoric has been largely centered on class warfare and throwing the business community under the bus.

Peter Ferrara, who is a Senior Fellow for Entitlement and Budget policy at the Heartland Institute, recently recommended policymakers follow the philosophy of President Ronald Reagan in engineering an economic recovery. As Ferrara wrote:

To revive the economy and restore full employment, Washington needs to restore the four planks of Reaganomics. One, cut tax rates for both corporations and individuals to expand incentives for production and job creation. Two, cut government spending to reduce the drain on the private sector. Three, deregulate, to reduce costs and production barriers for both businesses and consumers. Four, enact a restrained, anti-inflationary monetary policy to maintain a stable dollar, which encourages job-creating investment, because investors are assured that their investment will not be devalued by inflation or a declining dollar.[4]

The economic policies that guided Reagan can work today as well. President Reagan’s economic policies, although not perfect, did create a prosperous economy, job creation, and a strong dollar. Reagan’s economic philosophy centered on constitutional limited government. Reagan outlined his view of key economic principles in his “economic Bill of Rights,” in which he called for:

  • freedom to work;
  • freedom to enjoy the fruits of one’s labor;
  • freedom to own and control one’s property;
  • freedom to participate in the free market.[5]

Reagan also called for a Balanced Budget Amendment to the Constitution, which is similar to the current Republican and Tea Party Cut, Cap, and Balance plan to resolve the fiscal emergency.[6] Reagan understood the necessity of reducing spending, regulations, and creating a tax code that is business friendly.

Historically following a limited-government approach has led to economic recovery as well as prosperity. Burton Folsom, an economic historian and author of New Deal, Raw Deal recently wrote:

Recessions are not new in American history. What is new is how we handle downturns in the economy. We had a recession and 12 percent unemployment after World War I. But [President Warren G.] Harding and [President Calvin] Coolidge did not opt for government spending; instead they slashed federal spending and cut the top tax rates from 73 to 25 percent. In two years, the jobs were back — unemployment had dropped to 2.4 percent and remained roughly that level for the rest of the decade. We also cut tax rates and federal spending after WWII and unemployment remained low (3.9 percent in 1946 and 1947). In the 1980s, President Reagan cut tax rates (but not federal spending) and the economy again recovered. In eight years, the Reagan administration added 14 million jobs in the U.S.[7]

“The evidence of the last hundred years suggests that cutting tax rates and limiting government is the surest way to spark economic development and job creation,” wrote Folsom.[8] Restoring the economy and solving the fiscal emergency will require spending reductions, tax reform, entitlement reform, and reducing unnecessary regulations which are hindering the economy. The Patient Protection and Affordable Care Act must be repealed as well to restore confidence in the economy. Only then will the credit rating be restored and these business-friendly policies will unleash the private sector job growth as well as restoring our fiscal house.

John R. Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Editorial, “Obama’s downgraded America: S & P tells it like it is, the U.S. is out of money,” The Washington Times, August 6, 2011, <http://www.washingtontimes.com/news/2011/aug/6/obamas-downgraded-america/> accessed on August 8, 2011.

[2] Ibid.

[3] Ibid.

[4] Peter Ferrara, contributor to National Review Online symposium, “Can Washington Find the Jobs?,” August 8, 2011, <http://www.nationalreview.com/articles/273839/can-washington-find-jobs-nro-symposium#> accessed on August 8, 2011.

[5] Ronald Reagan, “Remarks Announcing America’s Economic Bill of Rights, July 3, 1987,” The Public Papers of President Ronald Reagan, <http://www.reagan.utexas.edu/archives/speeches/1987/070387a.htm> accessed on April 29, 2009.

[6] Republican Study Committee, Cut, Cap, and Balance, < http://rsc.jordan.house.gov/Solutions/debtceiling.htm > accessed on August 15, 2011.

[7] Burton Folsom, Jr., contributor to National Review Online symposium, “Can Washington Find the Jobs?,” August 8, 2011, <http://www.nationalreview.com/articles/273839/can-washington-find-jobs-nro-symposium#> accessed on August 8, 2011.

[8] Ibid.