Four times in the past 100 years, the federal government pursued pro-growth economic policies to create an economic boom. But President Biden is signaling just the opposite policies and needs a refresher course on pro-growth economic policy.
The federal income tax was born in 1913 with the ratification of the 16th Amendment. Progressives at the time sold the tax as one that would apply only to the rich, at a maximum rate of 7 percent. Sound familiar?
Four years later, America was fighting World War I. Congress raised the top income tax rate to 77 percent to fund the war. The decade of the 1920s, when the American middle class was born, produced soaring jobs, rising wages, booming economic growth, low unemployment and stable inflation — the “Roaring Twenties” indeed.
Presidents Warren Harding and Calvin Coolidge appointed Pittsburgh banker Andrew Mellon as Treasury secretary. He led the adoption of the policies that created the Roaring Twenties. Mellon led income tax rate cuts from 77 percent down to 25 percent, the second greatest reduction in marginal tax rates (the rate on the “next dollar earned”) until after World War II. That provided incentives for strong business creation, expansion, investment, entrepreneurship and jobs. Unfortunately, poor trade and tariff policies (tax increases) after Mellon was gone led to the Great Depression.
In the 1930s, Congress raised tax rates again, to fund Franklin Roosevelt’s New Deal, fighting the Great Depression with massive, unprecedented federal spending. But those policies failed badly as unemployment soared to double-digits for more than a decade.
In the 1940s, the top marginal tax rate was raised to 91 percent, to fight World War II. Congress kept finding ways to spend the money after the war, including the interstate highway system and America’s enormous nuclear stockpile, supported by President Dwight Eisenhower.
By 1960, when John Kennedy was elected president, the top income tax rate remained at 91 percent, which Kennedy promised to reduce to get the country moving again. As a student of history, he proposed a 30 percent cut in income tax rates, from the top rate of 91 percent to the bottom rate of 20 percent, repeating Mellon’s experience of the 1920s.
Kennedy’s promise was fulfilled after his assassination in 1963, when his successor, Lyndon Johnson, compromised on an average 23 percent cut.
Kennedy’s Keynesian economists rushed to take credit for the resulting 1960s boom. But, in truth, Kennedy was being advised secretly by the young economist Robert Mundell, who later won a Nobel Prize in 1999. Mundell urged a second component for the boom: stable dollar monetary policy, with no inflation or deflation. Kennedy enjoyed that monetary policy automatically under the gold standard, which he fervently supported.
When he was elected in 1980, Ronald Reagan added a third policy to the pro-growth mix: deregulation. Reagan viewed government regulation much like taxation — that is, raising costs for doing business.
Reagan also advocated “limited government” through the slashing of government spending. He understood that only investment through the private sector, not “central planning” government spending, would promote growth.
Reagan reprised Kennedy’s 30 percent tax cut and compromised down to 25 percent through the Economic Recovery Tax Act, proposed by Rep. Jack Kemp (R-N.Y.) and Sen. Bill Roth (R-Del). The bill passed with broad bipartisan support, after Reagan’s compromise, and the tax cuts were phased in from 1981 to 1983.
Reagan’s economic expansion was realized soon after Kemp-Roth passed and his sound monetary policy shut down inflation. Reagan backed Fed Chairman Paul Volcker, who implemented economist Milton Friedman’s slow money supply growth policies that cut the double-digit inflation of the 1970s in half by 1982, and in half again by 1983 (3 percent) — never again to be heard from again.
After Reagan was re-elected, carrying 49 states in 1984, Democrats proposed their own round of tax reform, which was compromised down to just two rates — 28 percent for the rich and 15 percent for the middle class. The poor were exempt.
The Reagan boom began late in 1982, and continued for 25 years, until late 2007.
The fourth boom occurred under President Trump, starting with his 2017 Tax Cuts and Jobs Act. Trump cut the corporate tax rate from a combined total of nearly 40 percent, counting state rates on average, down to 21 percent. He also cut rates for the middle class.
Trump deregulated energy production, and America ultimately led the world in production of oil and natural gas. Trump supported the Fed in following sound monetary policy of near-zero interest rates, with no inflation or deflation.
Trump’s blue-collar boom achieved the lowest unemployment rates since Kennedy was in the White House, with record low unemployment for Blacks, Hispanics and Asians, and record wages and incomes for the middle class.
But Biden now is pursuing the opposite of each of these policies, proposing to reverse Trump’s tax cuts and adopt record new government spending. His loose monetary policy is bound to produce renewed inflation and cause soaring interest rates. Then there’s the looming re-regulation that would occur with the costly, highly questionable Green New Deal.
Biden’s policies will necessarily achieve the opposite results of Trump’s economic boom, bringing the added hardship of record inflation, expanded unemployment and no new job creation. Instead of a blue-collar boom, Biden will be lucky to avoid a market-disciplining crash.
Lewis K. Uhler is founder and chairman of the National Tax Limitation Committee and National Tax Limitation Foundation (NTLF). He was a contemporary and collaborator with President Ronald Reagan and economist Milton Friedman.
Peter Ferrara is a senior fellow with the Heartland Institute and NTLF and teaches economics at King’s College in New York. He served in the White House Office of Policy Development under President Reagan, and as associate deputy U.S. attorney general under President George H.W. Bush.