How to Reignite Economic Growth: Returning Back to the Economic Policies of John F. Kennedy & Ronald Reagan
It's true: The economy grew in the second quarter of 2016 by an annual rate of only 1.2%.
As a recent Wall Street Journal editorial pointed out:
The meager growth took most economists and Wall Street analysts by surprise, coming in at less than half the consensus forecast of 2.6%.
This means that since last September the economy has pumped the brakes from the 2.2% average from 2012-2015 into a near-stall speed of about 1%.
Seven years after the recession ended, President Obama took credit for an economy that he called 'stronger and more prosperous than it was when we started.'
Worse, capital investment and spending by business has stalled. Dozens of the biggest U.S. companies have reported a shrinkage in overall profits for the fourth consecutive quarter.
It's Time for a Reality Check
The accumulated public debt—the total of all past deficits—is approaching $20 trillion, and the CBO projects $8.5 trillion will be added by 2025.
Most economists—liberal and conservative—think the rising accumulated public debt is unsustainable and could endanger the country’s solvency in a financial or military crisis.
Record highs on Wall Street "mask an uncomfortable truth: Corporate America is still in the midst of recession,” Ylan Mui wrote in The Washington Post. “Corporate earnings are supposed to be the bedrock of stock market value, but at the moment, they appear to be pointing in opposite directions.”
Mui described the decline in corporate profits as "a lurking variable that could signal a full-blown recession is headed our way...”
Mui also pointed out: "...Considering the fact that out of 12 'earning recessions' since 1954, nine were accompanied by economic recessions a year before or after."
Proposed Solutions to Avoid a Catastrophe
The Democrats are proposing more spending for social programs, clean energy, and a massive stimulus bill for infrastructure repair. In all likelihood, this will be accompanied by increased corporate and individual taxes.
Feedback from actual results seem to play no role in changing opinions on the results of stimulus spending to reignite economic growth. The central economic event of the Obama administration was an $834 billion stimulus bill in 2009. It was a dud!
There has not been one single case of government spending stimulating the economy, let alone one of government spending turning around a recession or depression.
In many well-documented articles celebrated economist Arthur Laffer has demonstrated "of the 34 countries in the Organization for Economic Cooperation and Development, those with the largest spending spurts… saw the least growth in GDP rates before and after their respective stimulus spending…The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth."
Japan and the United Kingdom among many others tried the same thing with disastrous results.
Logical But Wrong
The rationale seems so logical: Inject large quantities of money into a weak economy via public spending, and the population will, then, use the expected money to make purchases. Consumption will be stimulated which cause private companies to hire more workers to meet the increse in demand.
There's only one problem with this. It doesn't work. Never has!
It will be wonderful if it did. But those with fixed mindsets (fixed mindsets do not learn) refuse to acknowledge feedback from actual results, let alone search for alternative solutions that do work.
Conclusion: Government deficits do not stimulate the economy.
What Does Work
Lawrence Kudlow and Brian Domitrovic in their astonishing new book JFK and the Reagan Revolution: A Secret History provides all the empirical evidence required to illustrate what has always worked, provided a country has a functioning civil society.
In a nutshell, there are two basic truths: (1) the engine of economic growth is the private sector and (2) government's responsibility is to make sure that growth happens, and is done by getting out of the way.
These two basic truths have kept America prosperous. Kudlow and Domitrovic write that the government "does not need to stimulate demand; businesses and entrepreneurs know how to do that through innovation and entrepreneurship."
Guess who practiced this philosophy and its resulting policies? President John F. Kennedy. This is the model to follow. It's called the John F. Kennedy–Ronald Reagan model. As Kudlow and Domitrovic explain:
It is the model of getting the government restrained and modest in its two key areas of economic policy: fiscal policy and monetary policy…
Both Kennedy and Reagan identified substantially cutting income tax rates and getting the dollar strong and stable as the specific policy mix that would let the private sector, which is to say the real economy, thrive.
The authors go on to demonstrate that it was Kennedy in the early 60s that pioneered the economic policies Republicans advocate today. Further, Reagan "creatively imitated" what Kennedy initiated.
Why wouldn't he? There was ample evidence that it produced incredible results. And Reagan was results-focused.
Indeed, when Kennedy came into office, economic growth was dismal. His presidency launched the United States on one of the longest, greatest economic expansions in recorded history.
Back to 2016
Republicans are proposing massive tax breaks coupled with systematic abandonment of trillions of dollars of obsolete, outgrown, and unproductive government activities and programs.
They believe pro-growth tax reductions will stimulate business investment, innovation and entrepreneurship, and lead to a greatly expanded tax base (i.e. increased government revenues).
Jim Clifton, CEO of Gallup, says: "When there is no job growth, the once huge tax base that pays for everything begins to shrink and critical government services and entitlements including government pensions, Social Security, Medicare and the like will be drastically cut."
This is an extremely important message. Any attempt to cut entitlements—or even slow their growth—will be bitterly resisted. Ample evidence exists for this assertion.
To repeat: Returning to the policies of Kennedy and Reagan makes it possible to keep important entitlement programs in place (when accompanied by eliminating result-less government activities and programs that are costing trillions of dollars).
In short, without substantial economic growth and permanent government cost-cutting, we can expect further assaults on civil society and a continuation, if not acceleration, of the lawlessness (i.e. tyranny) that now seems to be characterizing our nation (see: The Needed Government Turnaround, Part 2: Strength of the U.S. Economy Depends on Re-strategizing and Permanent Cost-Cutting).
For more on the economic problems we are facing, we recommend reading The Needed Government Turnaround, Part 1: The Forces Behind Tomorrow's Headline News and Drucker as Economist: Part 1: Venezuela's Slide into Crisis & Its Lesson for America.
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