With Gingrich, the Supply-Side Revolution Rides Again
An economic reform plan in the face of sluggish recovery, 9% unemployment, and a Federal Reserve at wit's end about all the "solutions" it has striven to apply. Contents: across-the-board cuts in the income tax, full-scale expensing of new investment against taxes, and a monetary-policy commitment to a strong dollar.
This was the economic plan of Ronald Reagan in 1981-82, as he confronted in the first year of his presidency what had shaped up to be the worst recession since the Great Depression. Here were the numbers: growth at 1.8% per annum for nine years in the context of serial recessions; unemployment and inflation so high that they summed to over 20%; and a stock market so stubbornly flat that against hedges such as gold and oil it had lost three-quarters of its value.
What happened? After a year-and-a-half of implementation, the Reagan plan worked so spectacularly that growth amped up to 4.3% for a seven-year run, inflation collapsed, unemployment got halved, and stocks went into bull mode for two decades while commodities plummeted.
The Reagan economic plan is simply one of the greatest public-policy correctives ever tried in contemporary history. The question is why during our own Great Recession, so few policymakers and office-seekers have sought to draw inspiration from it.
With the elaboration of Newt Gingrich's economic plan, we need not ask this question any longer. For the above-mentioned contents of the Reagan plan - across-the-board tax cuts, expensing of investments, and a strong dollar policy - are precisely the contents of the Gingrich plan. Hence we now see the great enunciators of Reagan's supply-side revolution - such as Dr. Arthur B. Laffer - rally to Gingrich today.
One of the secrets of the success of the Reagan plan in the 1980s was the steadfast support it generated among young officeholders and policymakers. As I observed in my 2009 book on the history of supply-side economics, Econoclasts, so many of those who pushed the Reagan Revolution into fruition on Capitol Hill in the early 1980s were young - under 40 if not 30 years of age. The reason was clear: if the nation continued to stagger along at under 2% growth for the long term, the young would grow old having never had their shot at the American dream.
It is only fitting, then, that one of the young supply-side legislators from those heroic days should champion the supply-side banner once again, in economic conditions today that are beginning to look shockingly close to those the nation endured in the stagflationary 1970s and early 1980s.
Newt Gingrich was first elected to Congress in November 1978, as it happens the day after President Jimmy Carter signed a capital-gains tax cut into law, a move Carter only made to stymie a greater reduction in income-tax rates.
That greater reduction was the "Kemp-Roth" across-the-board rate cut that Carter had killed in committee the month before and which Gingrich would make his own in his first two terms in Congress, until Kemp-Roth became law in 1981 as the centerpiece of the Reagan effort. What we are seeing in the Gingrich plan in 2011 is the institutional memory of the Reagan Revolution finally having its impress in our lamentable economic circumstances today.
The Gingrich plan is more capacious than even was Reagan's of thirty years ago. It includes a two-thirds reduction in the corporate tax (Reagan left corporate rates alone in 1981), an elimination of estate and capital-gains taxes, and a flat tax of just 15%.
But this too is in character. Kemp-Roth didn't include investment-expensing provisions until it matured on Capitol Hill as the Reagan Revolution gathered; in the tax-reform saga of 1986, the supply-siders hoped for a reduction in the top rate of the income tax to 38%, and pushed so hard that they got 28%. The point is to press for a great deal so that substantial reform in fact takes place.
So much about the Gingrich plan is resonant with what worked a generation ago. It would have been a most unfortunate episode of historical amnesia, with terrible consequences for the nation, if the 2012 election were to have come and gone absent a serious opportunity for Americans to learn about and vote on precisely the policies that put our last great recession - that of the 1970s and early 1980s - to pasture.
If something worked in the past, you try it again. Thankfully, Gingrich is giving us that opportunity with respect to the supply-side revolution.