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July 23, 2011

Will Obama Ever Learn Economics from Reagan?

By and

The centennial of Ronald Reagan's birth earlier this year brought an unusual sight: a round of press reports noting President Obama's admiration for his predecessor, including one he penned for this newspaper.

Despite their stark differences on policy, Obama praised Reagan for how he led the nation "through an extremely difficult period, with economic hardship at home and very real threats beyond our borders." And, lo and behold, many pundits are now comparing what they call Reagan's willingness to compromise on taxes to what they say is the intransigence of today's GOP.

A cautionary tale

Leading the nation through hard times wasn't easy. We'd like to suggest that President Obama take a closer look at how President Reagan dealt with that "economic hardship," and how he steered the nation toward what would turn into its longest peacetime economic expansion. It's a cautionary tale — one that involves the greatest domestic error of his administration.

In 1981, President Reagan's plan for revitalizing the economy was a four-fold one:

1) Reduce tax rates across the board.

2) Decrease unnecessary regulations.

3) Work with the Federal Reserve to maintain stable monetary policy.

4) Slow the growth of federal spending.

President Reagan got his tax-rate cuts through Congress later that year. But because they were being phased in gradually, the economic pain they were designed to alleviate lingered well into 1982. High deficits persisted, and he faced enormous pressure to raise taxes.

The president had no interest in increasing taxes, but he agreed to consider some kind of compromise with Congress. His representatives began meeting with members of House Speaker Tip O'Neill's team to find some way to hammer out a deficit-reduction pact. So began what, in our opinion, became the "Debacle of 1982."

From the outset, the basic idea of the GOP participants was to trade some kind of concessions on the tax front for a Democratic agreement on spending cutbacks. The negotiators knew that Ronald Reagan would be hard to sell on any tax hikes. So they included a ploy they felt might overcome his resistance: a large reduction in federal spending in return for a modest rise in business (but not individual) taxes.

The ratio in the final deal — the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) — was $3 in spending cuts for every $1 in tax increases. It sounded persuasive at the time. Believing it to be the only way to get spending under control, most of the president's colleagues signed on. He disliked the tax hikes, of course, but he agreed to it as well.

The cuts never came

You don't have to be a Washington veteran to predict what happened next. The tax increases were promptly enacted — Congress had no problem accepting that part of the deal — but the promised budget cuts never materialized. After the tax bill passed, some legislators of both parties even claimed that there had been no real commitment to the 3-to-1 ratio.

In fact, spending for fiscal year 1983 was some $48 billion higher than the budget targets, and no progress was made in lowering the deficit. Even tax receipts for that year went down — a lingering effect of the recession, which the additional business taxes did nothing to redress.

Fortunately, the individual income tax-rate reductions that had been passed the year before remained intact. And as they took effect, the economy began its remarkable turnaround. The recovery of 1983-84 was strong enough that it paved the way for President Reagan's landslide election to a second term.

More than two years into President Obama's presidency, however, the prospects of Reagan-style recovery seem remote, to say the least. Rather than learning pro-growth lessons from President Reagan, he is creating another 1982 moment, seeking to lure Republicans into accepting another tax increase for illusory spending cuts.

Taxing our way to prosperity isn't the answer. It never has been. If our children and grandchildren are to live in a free and prosperous America, congressional Republicans must not negotiate and accept a deal that raises taxes. That's why The Heritage Foundation last year created Heritage Action for America — to ensure that members of Congress fight for the advance of freedom and are held to account.

President Reagan "had faith in the American promise," President Obama notes. Reagan demonstrated that faith by trusting the American people to do the right thing, not by confiscating their wealth and subjecting them to myriad rules and regulations that stifle their creativity and sap their innovation.

"He recognized that each of us has the power — as individuals and as a nation — to shape our own destiny," President Obama wrote this past January. That destiny, however, can be realized only in an atmosphere of freedom. Will the current president learn from the lessons of 1982?

Former U.S. attorney general Edwin Meese III holds the Ronald Reagan Chair in Public Policy at The Heritage Foundation. Michael Needham is chief executive officer of Heritage Action for America.

First appeared in USA Today

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