The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Tax and Spend Won't Fix the Results of the Financial Crisis

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


Today, the President gave a speech on the five-year anniversary of the financial meltdown and claimed his policies of government “investments” and intrusion into the private sector, higher taxes, and more regulations have helped the economy turn the corner.  He called for more government spending as he claimed, yet again, turning the economy around is his top priority.  But his policies have prolonged the financial turn down and have created a stagnant economy, perpetual high-unemployment, a shrinking job market, and a bigger welfare state.

Larry Kudlow has a better idea to really turn things around.  He is CEO of Kudlow & Co., LLC (an economic and investment research firm), the host of CNBC’s Kudlow and Company, and a national columnist.  As an economist that served as the associate director for economics and planning within the Office of Management and Budget (OMB) during the Reagan administration, he knows something about robust recoveries.

Just about a month ago, he wrote a column on how anemic the Obama recovery is compared to past recoveries.  Yet what he wrote at that time addresses everything the president said today.

Kudlow states, “The actual economy shows real GDP falling well below 2 percent. This so-called recovery remains the worst in modern history dating back to 1947” and he notes that the sluggish economy is why the president’s approval rating on this issue has dropped to 35 percent.

Kudlow also says, “And as far as solutions go, Obama keeps giving us the same old, same old: End the spending-cut sequester, lower tax deductions, and raise taxes on the rich, all to free up money for infrastructure, green energy, ‘manufacturing innovation initiatives,’ and the teachers’ unions.”

And sure enough, what does the president call for in his remarks today but that the “first order of business must be to pass a sensible budget that replaces the sequester with a balanced plan that is both fiscally sound and funds the investments like education and basic research and infrastructure that we need to grow” and “a balanced plan that includes closing tax loopholes that benefit corporations and the wealthiest Americans at the expense of the middle class.”

The president also addresses Obamacare by saying that it is the law of the land, that it has helped millions of Americans, and that “A lot of the horror stories that were predicted about how this was going to shoot rates way up and there were going to be death panels and all that stuff -- none of that stuff has happened.  And in two weeks, the Affordable Care Act is going to help millions more people.  And there's no serious evidence that the law -- which has helped to keep down the rise in health care costs to their lowest level in 50 years -- is holding back economic growth.”

A lot of people disagree with the president’s assessment, including Larry Kudlow who says, “if [Obamacare] doesn’t fall of its own weight, [it] will add so many new taxes and regulations that it will sink the economy even more.”

As for not holding back economic growth, perhaps the president missed the poll of small business owners that “fear of the effect of the new health-care reform law on their bottom line [and] is prompting many to hold off on hiring and even to shed jobs in some cases.”

Perhaps the president missed the news from last week on how several major labor unions at the AFL-CIO convention expressed anger and passed a resolution criticizing what Obamacare is doing to their health plans and the 40-hour work week.  It seems the law is certainly becoming a horror story for them, as well as employees of companies such UPS, Delta, and Stryker, to name a few.

Kudlow calls for changes that have proven to work in the past and that is a lower and simpler tax rate.  These policies were adopted by Presidents Kennedy and Reagan and resulted in booming economies.

Kudlow sites how Obama doesn’t seem to remember history and is incorrect when he claims that after World War II there was “a growing middle class [and] it was the engine of our prosperity.”  Kudlow corrects Obama's history by saying:

From 1944 to 1960, with a top tax rate of 91 percent, the U.S. economy expanded at an anemic 2.1 percent annual pace, according to economic historian Brian Domitrovic.  And during the Eisenhower years, the economy grew at a subpar 2.4 percent yearly rate, including three recessions, which Domitrovic says made for ‘the worst growth of any post-war president until George W. Bush and Barack Obama came along.’

So much for post-war prosperity.

But then came the 1960s, the decade liberals love to hate. Why?  Because the path-breaking supply-side tax cuts of John F. Kennedy generated one of the greatest booms in economic history.

Actually, according to Domitrovic, it was two big tax cuts.  The first was a business tax cut put in place in 1962, and the second was an across-the-board personal tax cut that began in early 1964. The result?  Domitrovic reminds us that the eight-year expansion from 1961 to 1969 saw growth of 48 percent -- a third more in an eight-year period than in the 16 years ending in 1960.

So the post-war prosperity of 1944 to 1969 did exist at roughly 3 percent per year.  But only because the 1960s lifted everything up.  Kennedy cut the top tax rate from 91 percent to 70 percent, but all other tax rates were also reduced for top-to-bottom income earners.

Conveniently, John Kennedy’s powerful tax-cut slashing on business, individuals, and investors doesn’t exist in the Left’s post-war, economic narrative.  It’s been rubbed out of history, replaced by a liberal vision of powerful unions and high tax rates on the rich, which is supposed to create growth.  And expectedly, Obama and the Left never make the connection between the Kennedy tax cuts and the Reagan tax cuts 20 years later, which essentially copied the JFK model.”

In his speech today, the president also reminds us that he too has called for tax reform by saying he wants "a deal that lowers the corporate tax rate for businesses and manufacturers, simplifies it for small business owners, as long as we use some of the money that we save to invest in the infrastructure our businesses need, and to create more good jobs and with good wages for the middle-class folks who work at those businesses.  My position is, if folks in this town want a ‘grand bargain,’ how about a grand bargain for middle-class jobs?"

And since Obama keeps recycling his big government, pseudo-tax reform, stimulus policies, Kudlow addressed that too in his month-old article:

When President Obama talks about a grand bargain for corporate tax reform to raise more revenues to be used for more stimulus spending, or a budget that would end the sequester and its budget caps and stick it to the well to do with a near $1 trillion tax hike, he completely skips the Kennedy-Reagan growth story.

None of Obama’s tax-and-spend proposals will pass the current Congress. He knows that, and so does everybody else. But to suggest that his policies would benefit the middle class or the rest of the economy is cynical and misleading.

President Obama is a former law professor.  Even accounting for his huge policy differences with JFK and Reagan, he should do us all the courtesy of getting his history straight.”

The president talked about how we are nearing the end of the fiscal year (Sept. 30) and the need to address the debt ceiling.  The president mentions how the nation’s deficits are “falling fast” and that it would be “irresponsible” to keep the sequester in place. (Treasury Secretary Jack Lew has said mid-October is when is can no longer use “extraordinary measures” to meet the nation’s debt obligations without raising the debt ceiling.)

But it is the sequester that has helped control spending making it possible for the deficit to shrink.  It is vital that Congress keep the current spending caps in place.  Better yet would be to cut the size of government even more.

What we need is a combination of policies, first is major tax reform in the Kennedy/Reagan model as Kudlow writes about.  That will help spur the economy and create more jobs.  That means more people will be getting a salary and paying taxes that brings more revenue into goverment coffers.  The second is to continue to cut government spending.  These two policies will help our economy immensly and further reduce the deficit.

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