Why Obamanomics Has Failed … Uncertainty about future taxes and regulations is enemy No. 1 of economic growth. The administration's stimulus program has failed. Growth is slow and unemployment remains high. The president, his friends and advisers talk endlessly about the circumstances they inherited as a way of avoiding responsibility for the 18 months for which they are responsible. But they want new stimulus measures—which is convincing evidence that they too recognize that the earlier measures failed. And so the U.S. was odd-man out at the G-20 meeting over the weekend, continuing to call for more government spending in the face of European resistance. The contrast with President Reagan's antirecession and pro-growth measures in 1981 is striking. Reagan reduced marginal and corporate tax rates and slowed the growth of nondefense spending. Recovery began about a year later. After 18 months, the economy grew more than 9% and it continued to expand above trend rates. – Wall Street Journal
Dominant Social Theme: Lower taxes and cut regulations for growth.
Free-Market Analysis: We have remarked many times before on the fiscal and regulatory emphases that comprise the "free-market thinking" of the mainstream Western media. This article is a good example, excoriating the high-ticket gymnastics of the Obama administration when it comes to spending in order to "stimulate" the economy.
But to blame Obama for what is occurring today around the world and especially in the West, is to be somewhat misleading in our opinion. In fact, a close reading of the article leaves one unsure of what the author, famous economist Allan H. Meltzer is driving at. He spends a good deal of time writing about spending by the Obama administration, but he concludes as follows: "That's what the U.S. needs now. Not major cuts in current spending, but a credible plan showing that authorities will not wait for a fiscal crisis but begin to act prudently and continue until deficits disappear, and the debt is below 60% of GDP."
So it's not spending cuts that will bring the US back, but tax cuts, he seems to be saying – and encouraging business growth. But taxes and regulation are only two legs of a three-legged stool and to leave one leg strikes as providing an incomplete explanation as to how Western economies work and why they fail.
Though it is not exactly a subtle point, it took us a long time to pick up on this, analytically speaking, because on the surface cutting taxes and regulation is indeed an admirable approach to smaller government. Actually, it is the availability of money-on-demand – and its creator, mercantilist central banking – that allows the growth of government which then in turn justifies an increasingly aggressive system of taxation.
We were tipped off to the nature of this dominant social theme (that the problems with Western economies have to do with taxes and regulation, not banking) by an interview we did with the best-selling author and economic writer George Gilder. Gilder himself is a so-called "supply-sider" – someone who believes in the efficacy of tax cuts when it comes to stimulating the economy. But in that Bell interview, he explained that there was a political reason for tax cuts as well. Here's how we reported on his perspective in Bell afterthoughts:
But the major point of enlightenment as regards this interview – from our viewpoint – is the statement made about libertarian congressman Ron Paul (R-Tex). Now from our point of view, Ron Paul is a man with a cast of mind similar to George Gilder's. Gilder, however, doesn't see it that way. He seems somewhat skeptical of Ron Paul.
"Like many movement libertarians, he always prefers the quixotic ideal (radical spending cuts) to the feasible improvement of lower tax rates," Gilder states in the interview above. And then he adds of Ron Paul, that, "by opposing defense spending and American power he has become a shill for the enemies of capitalism and freedom."
He also states in answer to the next question about the impact of the US Tea Party movement, "[They are] a fully beneficial force as long as they stress tax cuts rather than spending cuts. Lower tax rates are good in themselves. Lower spending always ends up focusing on defense."
To read the full interview with George Gilder, Click Here.
This was indeed a kind of epiphany for us. As free-market thinkers we are always apt to endorse cuts in taxes and regulations. But it had never occurred to us that one of the REASONS for emphasizing so-called supply side economics was to avoid having a debate over making government smaller via SPENDING cuts. And the reason for avoiding this debate, according to Gilder, was because the conversation about spending cuts always ended up at the Pentagon's front door.
This is the reason, in our opinion, that Western governments, especially the US government, inevitably get bigger. When there can be no serious, ongoing discussion about cutting spending, and when defense spending especially is sacrosanct, you will always end up with bigger government. Reagan did manage in our opinion to stimulate a bit by cutting some taxes, but the budget deficit ballooned because of vast military expenditures. The government ended up with more debt after Reagan left office and was actually bigger in numerous ways.
We have stated before that we believe Reagan was not cynical about minimizing government and did try to do things that would cut back on the imperial state. The primary reason, however, that US government spending was not minimized during the Reagan era turns out to be because the emphasis was on cutting taxes not government – and according to Gilder this was no accident.
The myth of Reaganomics is seductive and heart-warming because Reagan himself was a charmer and because the policies that were implemented under his watch seemed congruent with his message. Not only that, but when such policies are updated and suggested by authoritative commentators within an informative context in an important paper, they can seem pretty overwhelming. Here's some more from Meltzer's article:
Almost daily, Mr. Obama uses his rhetorical skill to castigate businessmen who have the audacity to hope for profitable opportunities. No president since Franklin Roosevelt has taken that route. President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it's harmful now.
In 1980, I had the privilege of advising Prime Minister Margaret Thatcher to ignore the demands of 360 British economists who made the outrageous claim that Britain would never (yes, never) recover from her decision to reduce government spending during a severe recession. They wanted more spending. She responded with a speech promising to stay with her tight budget. She kept a sustained focus on long-term problems. Expectations about the economy's future improved, and the recovery soon began …
Successful leaders give the public reason to believe that they have a long-term program to bring a better tomorrow. Let's plan our way out of our explosive deficits and our hesitant and jobless recovery by reducing uncertainty and encouraging growth.
It all sounds very convincing – and certainly we are not suggesting that Meltzer himself is trying to mislead or is in any sense less than sincere. But with the benefit of hindsight we can see that neither Reagan or Thatcher accomplished as much in the way of diminishing their respective federal governments as one might think, given the approving rhetoric surrounding their respective administrations. Such lack of progress, over decades, in fact, inevitably gives rise to cynicism. The overwhelming attitude becomes one of despair that anything can ever be done to rein in big government.
Thus, we re-emphasize most strongly that no credible plan for reducing the size of government has been put into place for at least the last century if not longer in either Britain or America. Such a plan would include radical SPENDING cuts at the federal level but, just as importantly, would attempt to vastly diminish the power of mercantilist central banking or, preferably, eliminate it outright. In fact, if there were any one thing that could be done to help reduce government and revive the economy, it would be to get rid of the pernicious enterprise of central banking altogether and return to private money – which is almost inevitably gold and silver.
It is both telling and unfortunate that Meltzer does not mention central banking in his otherwise elegant and free-market oriented Journal screed. It is unfortunate especially because without a discussion of central banking and its pernicious impact there is simply no way of understanding how Western economies really work and why, ultimately, they fail.
It is central banking that gives rise to the booms that lead to tremendous industrial euphorias. As these abate, revenues diminish and calls for increased taxes arise. As local economies fail, people grow angry and demand that the government act through increased regulation to punish wrongdoers and recalibrate marketplaces. It is central banking that ultimately hollows out economies by causing small businesses to fail and generating consolidation that favors grossly inefficient, corrupt and powerful multinationals that are controlled of course by the Western power elite rather than by local or regional entrepreneurs.
Mercantilist central banking, in our humble opinion, lies at the heart of every problem that Western democracies face. The huge pools of money available to central bankers and their highly placed colleagues in private industry ensure that the worst elements of governance receive the most funding and are the most highly cultivated.
The endless warring, constant economic crises and ongoing destruction of civil society can all be laid at the doorstep of modern central banking with much justification, as we regularly try to show. Compared to the mechanism and practice of central banking, taxes and regulation are lesser issues and ought to receive less emphasis in the larger context, not more – even by one so sophisticated about economic issues as Meltzer.