Wednesday, March 23, 2011

Reagan's Legacy and the Current Malaise

As evidenced by the collapse of the Soviet Union back in the Reagan days, a government controlled economy is doomed to fail. The Democrats in Congress during the latter Bush years and now with Obama at the helm have, in four short years, inserted the government into our economy to an extent once thought impossible. Major inroads into our auto industry, housing market, financial and health care systems have brought our economy to a standstill.

As Steve Forbes points out in this WSJ article, Reagan and Art Laffer had the right idea. Get government out of the way and the ingenuity of the American people will solve the problem.

Reagan came into the White House facing an economy as troubled as ours—one that had even higher unemployment, catastrophic interest rates (18% for mortgages) and a stock market that in real terms had fallen 60% from its mid-1960s levels. When he left office eight years later, the U.S. had become an economic miracle: 18 million new jobs had been created; Silicon Valley had blossomed, becoming a global symbol for innovation; and the stock market was experiencing a bull run that, despite dramatic ups and downs, didn't end until the turn of the 21st century, after the Dow had expanded 15-fold. The expansion of the U.S. economy exceeded the entire size of West Germany's economy, then the world's third-largest.

How did this happen? You could make the case that Reagan's economic miracle had its origins at a Washington, D.C., restaurant in 1974. That December night, 34-year-old University of Chicago professor, Art Laffer, scribbled a single—and now legendary—curve on a cocktail napkin to illustrate to a group of President Ford's advisers why a proposed plan to raise taxes would not increase government revenues. Mr. Laffer posited that deep cuts in existing tax rates would stimulate the economy and ultimately lead to far higher government revenues. Conversely, increase the tax burden and government receipts would fall below expectations because of a weaker economy.

Reagan aggressively embraced free-market, supply-side principles that empowered the American people to rebuild and creatively expand our economy and standard of living. In contrast, the Obama administration has expanded the powers of government over us and our economy on a scale never before seen in peacetime American history. President Reagan understood, and fervently believed in, the American spirit of free enterprise. So far, President Obama hasn't shown that he does.

Mr. Obama still has time to learn the real lessons of Reagan's success. Will he?

Read full Steve Forbes WSJ article here.

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