The campaigns of Steve Forbes and Pat Buchanan resonated with voters this primary season because they were the only two candidates running who directly addressed the problem of economic growth. Inside the Beltway everything seems fine – and why not? Bill Clinton has created lots of employment for policy wonks, with his everchanging agenda of plans to nationalize health care, raise taxes, and pay people to become "volunteers."
But out in the real world things are not so rosy. The latest government data confirm what voters see: the economy is flat; there is little economic growth. In the fourth quarter, real GDP grew less than 1 percent. In all of 1995 the economy only grew about 2 percent – down sharply from the 3.5 percent rate registered in 1994. In fact, during the three years of Clinton's presidency, growth has only averaged about 2.6 percent per year. The Clinton Administration would have us believe that two and a half percent annual growth is fine, maybe the best we can do. In fact, the administration warns against efforts to raise the growth rate because it would be inflationary.
But not so long ago we did a lot better. Real growth averaged 3.4 percent per year for eight years of the Reagan administration – including the effects of a deep recession. If we leave out the recession and look only at the last six years of the Reagan Administration, real GDP growth averaged 4.5 percent per year. And this was accomplished while inflation fell from 12.5 percent in 1980 to just 1.1 percent in 1986.
So the lesson of the 1980s is that it is possible to have faster growth – well above the two and a half percent rate that Clinton's economists tell us is the best we can do – without inflation.
How did Reagan do it? He did it by reducing the burden of government. Taxes were cut, the growth of spending was scaled back, and the burden of regulation was slashed. Taxes fell from 19.6 percent of GDP in 1980 to 18.9 percent in 1988. Outlays fell from 22.3 percent to 22.1 percent over the same period.
But perhaps even more important was Reagan's assault on federal regulation. According to Professor Thomas Hopkins of the Rochester Institute of Technology, the cost of federal regulation fell from 11.3 percent of GDP in 1980 to 8.1 percent in 1988. In other words, the reduction in the burden of regulation during the Reagan years was far greater than the reduction in the fiscal burden. Since 1988, unfortunately, the burden of regulation has risen again and is now back to 9 percent of GDP, according to Prof. Hopkins.
So why are Republicans so reluctant to defend the overwhelming economic success of the Reagan years? Many have bought the liberal line that growth was bought "on credit" with higher deficits, and that Reagan's tax cuts were a giveaway to the rich that only increased income inequality. This started with President Bush, who always seemed somewhat embarrassed by Reagan – it is hard to know how else to interpret the "kinder and gentler" line in his inaugural address.
The consequence is, as economist Paul Craig Roberts points out, that Republicans have handicapped themselves in addressing the growth issue because they neither understand the Reagan record nor are willing to defend it with enthusiasm. Moderate Republicans have become so obsessed with the budget deficit that they are incapable of looking at tax cuts except as a loss of revenue. In spite of the Reagan growth record, lower taxes only equal higher deficits in their limited, accountant's mentality.
To be sure, the House and Senate have voted to cut the capital gains tax and scale back regulation. But at the first sign of resistance from the Clinton Administration, Republicans backed off. Apparently, in their heart of hearts, many agree that cutting the capital gains tax only enriches the rich, and that more government regulation is necessary to protect the environment, schools, and various economic constituencies.
Into this self-created Republican vacuum stepped Pat Buchanan and Steve Forbes. Buchanan's message of isolation and trade protection is a false vision, and a counterproductive approach to economic malaise. But Pat offered solutions, and it is a political fact of life that even bad ideas will beat no ideas every time. Steve's ideas of hope, growth, and opportunity were much stronger, and offer a way out of the current Republican malaise.
Growing the economy – creating jobs, new businesses and opportunities – is neither impossible nor dangerous. President Kennedy did it with tax cuts. President Reagan did it with tax cuts, slower spending growth, and deregulation. It worked twice and it will work again – if Republicans will just do it.