Looking back to move forward

by Robert Maynard

Every once in a while it is a good idea for the forces of liberty to look back on where we have been in order to learn from previous victories.  It is in this spirit that the January/February 2014 edition of the Cato Institute Policy Report looks back at the tax revolts of the late 1970’s and early 1980’s.  Let’s reminisce a bit:

For about 15 years now, the federal government, in all its myriad activities, has been in major expansion mode. The Federal Reserve, the regulatory apparatus, the tax code, the police and surveillance machinery of the state — all of these extensions of the government have broadened their reach, power, and ambition in significant fashion since the late 1990s.

The basic metric that reflects all this is the level of federal spending. In 2013 the government of the United States spent 55 percent more money — in real, inflation-adjusted terms — than it did in 1999. Economic growth in that 14-year span has been 30 percent. Where government at all levels soaked up 32 percent of national economic output in 1999, it took in 37 percent in 2013 — an increase of nearly a sixth, in less than a decade and a half. By way of comparison, for the first 125 years of this nation’s existence under the Constitution, through 1914, government spending was largely parked between 3 percent and 6 percent of national output.

The gorging on the part of government in our recent past has been so unrelenting that aside from flashes from the likes of the Tea Party, the public is meeting the development with quiescence. At $6.4 trillion per year, total government spending is now so immense that any yearning for something smaller and more reasonable from our minders in the state runs the risk of appearing as quaint and otherworldly. Government that is huge and ever-expanding is a matter of concern in its own right. But perhaps less understood is an additional problem: the developments of the current millennium are inuring a rising generation of Americans to the immovable fact of big government.

We now not only have Leviathan, but also a crucial intellectual component of its perpetuation: government’s enormous growth ensures that memory of something different is harbored by fewer and fewer persons, getting older every year.

RECLAIMING A TRADITION

The moment is apt, then, to reclaim a tradition of our recent history, a tradition that the big-government 21st century is striving to suppress. This is the great successful effort to slow Leviathan of a generation and a half ago — the effort that gave us the Ronald Reagan revolution of the 1980s.

For despite the still large displacement of the economy, the market, and private life that the government brought about in the 1980s and 1990s, even in the wake of President Reagan’s major reforms, the scope of government in that era pales in contrast to what prevails today. From the early 1980s to the late 1990s, the Fed largely stuck to keeping the dollar sound against gold. Regulatory expansions planned in the 1970s did not come to pass thereafter. And the major spending initiatives tended to involve cuts, such as in welfare and defense.

Again, the outlay picture tells a tale. The federal government grew by 33 percent in real terms from 1983 to 1999, while the economy grew by 78 percent. Before the current millennium, we had a government that got bigger all right, but comfortably less than the economy did. Now, we have a government that leaves the economy in the dust when it comes to growth.

The achievements of the 1980s and 1990s stemmed from one source above all: the centerpiece of Ronald Reagan’s economics, the bill that Congress passed in the summer of 1981. This was the great tax cut that had been originally sponsored in Congress in the 1970s by Rep. Jack Kemp of New York and Sen. William V. Roth of Delaware, “Kemp-Roth.”

The tax cut of 1981 — which took all rates of the income tax down by an average of 23 percent, lowered the capital gains rate by 29 percent, and reduced business taxes — was the point of origin of the renaissance of the 1980s and 1990s whereby the economy expanded well in excess of the government.

The tax cut made everything else easy. First of all, it took the heat off the Fed. The Fed did not have to worry about stimulating the economy, because growth flowed from the tax cut. Furthermore, lower tax rates made loopholes less important as a source of profit, so business focused more on real entrepreneurship.