The following are excerpts and an adaptation from a recent speech to the Florida chapter of the International Council of Shopping Centers.
Good riddance 2009.
Someone please assure us it was just a bad dream. It was certainly surreal.
Whoever would have thought:
General Motors … now owned by the taxpayers. Merrill Lynch … with its bronze bull on Wall Street and the very symbol of American capitalism … gone. We now have a federal “pay czar.”
More: Florida’s unemployment rate is now 11.5%. The Gulf Coast’s unemployment rate averages 12.6%.
This is all so surreal. But it’s also real.
How are we ever going to get back on the “Road to Prosperity”?
History is our guide. History has shown us the “Road to Prosperity” four times.
Four presidents — Democrats and Republicans — have shown how tax-rate reductions re-invigorate the U.S. economy and put Americans back to work.
The first time occurred in the 1920s, when President Calvin Coolidge persuaded Congress in 1921 to lower tax rates. They went from the highest marginal rate of 73% in 1921 down to 25% in 1925.
And guess what followed? The Roaring ’20s — levels of affluence never seen in the United States. “The middle class and even many of the poor could, for the first time, afford radios and plumbing and hot water and trips to the movies,” wrote Arthur Laffer, Stephen Moore and Peter Tanous in “The End of Prosperity: How Higher Taxes Will Doom the Economy — If We Let It Happen.”
Between 1923 and 1928, while the economy boomed and tax rates fell, real tax collections nearly doubled.
Then came the crash of 1929.
If you read the history books of economic policy over the 30-year period from 1930 to 1960, the presidencies of Franklin Roosevelt, Harry Truman and Dwight Eisenhower and the congresses that served with them kept U.S. tax rates at extraordinarily high levels.
Throughout the 1930s, Roosevelt raised taxes — and unemployment remained above 12% — 24% at its height.
It wasn’t until 1945, under Truman, that Congress finally cut the highest tax rates — from 94% to 85%.
But that didn’t last long. In 1950, Truman signed into law a bill that raised the highest tax rate back to 92%.
And then when Republican Dwight Eisenhower became president, he vetoed a bill that would have cut U.S. tax rates. No surprise: By the end of Eisenhower’s second term, the U.S. economy was in the pits again.
Then along came a Democrat, John F. Kennedy.
In 1963, Kennedy spoke to the Economics Club of New York. At the time, the highest marginal tax rate was 91% and the lowest 20%.
“It is a paradoxical truth,” Kennedy said, “that tax rates are too high today, and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.”
When Kennedy’s tax cuts went into effect in 1964, the U.S. economy grew rapidly the next two years. The unemployment rate fell to its lowest levels in 30 years — from 7% when Kennedy took office to 3.6% in 1966.
And then, we did it again.
The Era of the Four Stooges
Laffer, Moore and Tanous refer to the period from 1966 to 1982 as the “Era of the Four Stooges of the American Presidency”:
• Lyndon Johnson — the Great “Welfare” Society, Vietnam and top tax rates of 77%;
• Richard Nixon — He was an economic disaster. Under Nixon, we saw the launch of the great regulatory state, the end of the gold standard, wage-and-price controls, uncontrolled federal spending and the start of out-of-control inflation. Unemployment doubled to 7%, and the federal budget increased 30%.
• Gerald Ford — Remember his buttons, “Whip Inflation Now”? Ford’s great economic accomplishment: a windfall profits tax on oil, which promptly made domestic oil more scarce.
Unemployment rose to 8.5%. Inflation hit 11% in 1974, up from 5% the previous year. In 1975, inflation was 9.2%. Even though inflation dropped to 5.7% in 1976, American voters had had enough.
• Jimmy Carter — Another disaster. More price controls on oil and oil shortages. More inflation.
While the money supply increased at an 11% annual rate, inflation hit 9% in 1978, rising to 14% in 1980. And of course, we all remember the 21.5% interest rates on mortgages.
The Four Stooges, indeed.
How prosperity returned
All of what the Four Stooges did should sound familiar. It’s what Washington has been doing and talking of doing through all of 2009: more federal spending, expanding regulation, increasing the money supply. All of which will bring us higher tax rates, rising inflation and rising unemployment.
But once again, look at history after the Four Stooges.
The late Robert Bartley, editor of the Wall Street Journal during the Reagan years, described the economic growth after Ronald Reagan’s 25% tax cuts in the title of his book: “The Seven Fat Years.” Wrote Bartley: “It was like we added another California to the economy.” Inflation fell from 14% to 3.5% by 1985. Real GDP growth averaged 3.2% versus 2% in the previous decade.
The National Bureau of Economic Research in 1999 declared the period of 1982 to 1999, which includes the Clinton years and the Gingrich Congress, “the longest sustained period of prosperity in the 20th century.”
And let’s not forget George W. Bush’s prescription for lifting the U.S. economy out of the dotcom crash and 9/11 recession of 2001. Bush pushed through cutting the dividend tax rate from 39.6% to 15% and the capital gains rate from 20% to 15%. The highest personal income tax rate fell from 39.6% to 35%. And the tax on business investment was lowered.
The stock market roared back in 2003, as soon as the tax cuts went into effect. This didn’t just enrich Wall Street; it also enriched school teachers and middle-class retirees and others whose 401(k)s were invested in mutual funds.
Business investment also surged. After falling 4.8% in 2001, business investment grew 9.5% in 2005. And by 2007, the U.S. had regained all of the jobs and then some that had been lost in the dotcom crash and 9/11 recession.
This prompted Laffer, Moore and Tanous to proclaim that “1982 to 2007 was the greatest period of wealth creation in the history of the planet … Adjusting for inflation, more wealth was created in America in the 25-year boom than in the previous 200 years.”
The message is clear
History has shown us how to get on the “Road to Prosperity.” Clearly, we’re not going to get there unless we abruptly turn around and head in the other direction — at every level … federal, state and local.
Studies have shown repeatedly that states and localities that have falling tax burdens always outperform states and localities with rising tax burdens. They always show higher economic growth, more job creation and higher incomes.
Florida is not going to be one of these states unless we can create a better insurance climate, continue to reform property taxes and defeat Hometown Democracy, Amendment 4 next November.
If we are to recover, Florida and the Gulf Coast need a better selling proposition. We must get the message across to our elected officials:
Florida has a great climate, but it must have a great business climate, too. Cut taxes, cut regulation. Give people and business the climate to come, stay and grow.
THE FOUR PRESIDENTS WHO BROUGHT BACK PROSPERITY
Action: Cut highest tax rates from 73% to 25%.
Reaction: The Roaring ’20s era of affluence. GDP rose 5.5% per year; U.S. tax collections doubled.
John F. Kennedy
Action: Cut highest tax rates from 91% to 70% and lowest rates from 20% to 14%.
Reaction: Jobless rate fell to 3.6%, lowest in 30 years; GDP rose 18.6% in two years.
Action: Cut tax rates 25%; top tax rate fell from 70% to 35%.
Reaction: Real GDP rose 3.2% vs. 2.8% during Ford-Carter. Family incomes rose 11%; inflation fell from 14% to 3.5%.
George W. Bush
Action: Dividend tax cut from 39.6% to 15%; cut highest personal rates from 39.6% to 35%.
Reaction: Business investment grew 9.5% in 2005; 7 million jobs created.