Obama is Wrong on Economics

Member Group : Reflections

Kicking his re-election message into high gear, President Obama declared last month that a "You’re on your own" economic system "doesn’t work."

Given the level of taxes, regulations, federal deficits and the overall
intrusiveness of government, Obama is erecting a straw man, misrepresenting the
positions of those who want to restore some fiscal discipline to runaway government operations and escalating levels of red ink.

We’re far from a "You’re on your own" system, a type of laissez faire Darwinism,
when trillion-dollar annual deficits are paying for everything from bailing out Wall Street to painting classrooms in Afghanistan.

"Now, it’s a simple theory," Obama explained. "And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much
government. That’s in America’s DNA. And that theory fits well on a bumper sticker.

But here’s the problem: it doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ’50s and ’60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory."

In fact, the idea of a more limited federal government did work in the ’60s when
President Kennedy stimulated the economy by cutting income taxes across the board by 30 percent. Business investment expanded, economic growth jumped by 50 percent, federal deficits dropped and unemployment declined.

In contrast, the fact that too much government can slow an economic recovery was
demonstrated in the ’30s when Franklin Roosevelt’s repetitive tax hikes prolonged and deepened the Great Depression.

Obama also left out, unsurprisingly, the incredible postwar boom of the ’80s,
initiated by Ronald Reagan and described by the National Bureau of Economic Research in 1999 as "the longest sustained period of prosperity in the 20th century."

Reagan cut tax rates on labor and capital, reduced the growth of government,
controlled the growth of the money supply and rolled back anti-growth regulations.

The top marginal tax rate was reduced from 70 percent to 55 percent to 28 percent.

The corporate income tax was cut from 48 percent to 34 percent, the capital gains tax rate was lowered from 28 percent to 20 percent and most of the poor were exempted from federal income taxes.

The result? Business investment and productivity increased, the rate of new business
formation rose sharply, economic growth increased, real wages increased and the
unemployment rate dropped from 7 percent in 1980 to 5.4 percent in 1988.

In short, tax cuts at the top, middle and bottom, along with the attendant increases in incentives to work, save and invest, directly benefited the overall society in the form of lower price increases, more jobs and less unemployment.

The "misery index" (the combination of the inflation rate and the unemployment rate) fell from 17.4 percent in 1980 to 9.6 percent in 1988, an economic turnaround that particularly helped those who were previously unemployed and those at lower income levels who could least afford annual rates of double-digit inflation.

"This is not class warfare — it’s math," Obama stated in a White House Rose Garden speech in September.

In fact, he’s totally ignoring the math, the economic numbers from the past 80
years, when he talks about what "doesn’t work."

Ralph R. Reiland is an associate professor of economics and the B. Kenneth Simon
professor of free enterprise at Robert Morris University in Pittsburgh.

Ralph R. Reiland
Pittsburgh, Pa. 15236
Phone: 412-527-2199
E-mail: [email protected]