By Peter Ferrara
Published: 02-13-09
The current president wants higher taxes more regulation more spending and loose money.
In his inaugural address President Barack Obama said The question we ask today is not whether our government is too big or too small but whether it works -- whether it helps families find jobs at a decent wage care they can afford a retirement that is dignified.
Or as administration spokeswoman Stephanie Cutter said in January the touchstone is What will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class? Were guided by what works not by any ideology or special interests.
Unfortunately this rhetoric is not true. Mr. Obamas economic policy is following not what has been proven to work but liberal ideology.
The best way to understand this is to compare whats being proposed now with what Ronald Reagan accomplished. In 1980 amid a seriously dysfunctional economy Reagan campaigned for president on an economic recovery program with four specific components.
The first was across-the-board reductions in tax rates to provide incentives for saving investment entrepreneurship and work. The second component was deregulation to remove unnecessary costs on the economy. In todays world that would especially mean removing the onerous restrictions on energy production -- allowing drilling offshore and onshore for oil and natural gas revival of the nuclear power industry and construction of more electric power plants.
Third was the control of government spending. In 1981 Reagan forced through Congress not only his famed historic tax cuts but also a package of budget cuts close to 5 of the federal budget -- equivalent to roughly $150 billion today. In constant dollars nondefense discretionary spending declined by 14.4 from 1981 to 1982 and by 16.8 from 1981 to 1983. Moreover in constant dollars this nondefense discretionary spending never returned to its 1981 level for the rest of Reagans two terms. By 1988 this spending was still down 14.4 from its 1981 level in constant dollars.
Even with the Reagan defense buildup which helped win the Cold War total federal spending declined to 21.2 of GDP in 1989 from 23.5 of GDP in 1983. Thats a real reduction of 10 in the size of government relative to the economy.
The fourth component of the Reagan recovery plan was tight anti-inflation monetary policy which was spectacularly successful. Inflation was cut in half to 6.2 in 1982 from 13.2 in 1980 and cut in half again to 3.2 in 1983.
We know such policies work because they turned around in just two years an economy far worse than todays. We were suffering from multiyear double-digit inflation double-digit unemployment double-digit interest rates declining incomes and rising poverty. In fact what we suffer with today is not the worst economy since the Great Depression but the worst economy since Jimmy Carter -- the last time liberals were dominant politically and intellectually.
The Obama administrations economic policies do not include any of the four Reagan components. In fact the stimulus plan is the greatest increase in government spending in the history of the planet.
Meanwhile the Fed is furiously reinflating sowing more havoc down the line.
Mr. Obama is still promising future increases in tax rates by letting the Bush tax cuts lapse because for ideological reasons he thinks even current rates are too low. And instead of deregulating for more energy production he is still promising massive increases in regulatory barriers -- through global warming cap-and-trade legislation -- to increased production from proven energy sources to serve an extreme environmentalist ideology.
This is why America seems so hopeless right now and so depressed. We are stuck going in exactly the wrong direction on economic policy because of currently dominant ideological fashions.
A natural economic recovery will begin sometime this year not because of the presidents policies but because soon this will be the longest recession since World War II.
However thanks to the administrations retrograde policies -- cut from the cloth of the 1970s and even the 1930s -- the recovery will not be what it should be.
Rather unemployment will remain too high and inflation will resurge recreating the disastrous economic results we suffered the last time Keynesian policies were dominant.
Mr. Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation. He served in the White House Office of Policy Development under President Reagan.
