Understanding American Prosperity

Report International Economies

Understanding American Prosperity

November 29, 2012 5 min read
Kim Holmes
Former Executive Vice President
Kim R. Holmes was the Executive Vice President at The Heritage Foundation.

If there is one outcome of liberty that makes possible all the rights Americans hold dear, it is prosperity. Prosperity gives us the chance to thrive and enjoy the blessings of liberty. Its precondition is economic freedom, the ability to profit from our own ideas and labor as we choose. Not only Americans but all people enjoy a right to economic freedom and the prosperity it brings. No authoritarian government has ever succeeded in delivering prosperity to successive generations. Only societies that embrace open markets, the rule of law, and democracy have seen more people prosper beyond the privileged few.

The “Way to Prosperity”

“What more is necessary,” Thomas Jefferson asked, “to make us a happy and a prosperous people?” His answer rings true: “a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”

We do not require government control or benefits in order to prosper. Nor do we need guaranteed health care or even abundant leisure time. Instead, we need the freedom to pursue our aspirations; to own property and to act on our initiative and profit from it; to have access to markets, capital, and resources; to live by the rule of law that is fairly and consistently applied; and to enjoy physical security in our persons and homes.

We are today witnessing what happens when government is mistakenly given the task of producing prosperity. It is reminiscent of government under Jimmy Carter, when we experienced “stagflation”—rising inflation and unemployment, stagnant markets, and high energy prices. Inflation, at just above 5 percent when he took office, was at 12 percent by the time he left. The top marginal tax rate reached an astounding 70 percent.

Ronald Reagan reversed course. “[T]he way to prosperity,” he said, “is not more bureaucracy and redistribution of wealth but less government and more freedom for the entrepreneur and for the creativity of the individual." During his presidency, the top marginal tax rate was slashed to 28 percent. When he left office, inflation had fallen to just over 4 percent.

Reagan’s policies ushered in the greatest peacetime expansion of the U.S. economy up to that point. Its effects also rippled around the world. By 2008, the World Bank found 600 million fewer people living in extreme poverty—a stunning decline of one-third from 1993.

That finding is even more dramatic if we take a longer historical view. According to one recent study, since 1800, the world’s population has increased sixfold. Despite fears that more people mean more poverty, per capita income worldwide increased 16-fold. In America, per capita gross domestic product (GDP) grew 36-fold. In the words of the study’s author, capitalism has done “more than anything else in the last 10,000 years of human history to alleviate the great social evil of poverty.”

Occupy Wall Street claims notwithstanding, the world is a far better place because of free markets, the policies of liberty and limited government the United States has long championed, and the security its second-to-none military provided.

Sadly, today’s political class ignores this record. Too many clamor for more government spending, costly and counterproductive regulatory regimes, and less defense spending. And they demand higher taxes to pay for it all. Yet Americans already will pay an estimated $4 trillion in taxes in 2012—$152 billion more than they will spend on housing, food, and clothing combined.

Washington’s tax-and-spend approach undermines important elements of the tradition that made America the exceptional nation. It is threatening our prosperity, our liberty, our security, and our leadership. Only the wealth that a vibrant free economy can produce will provide a military so strong that, in Reagan’s words, others would not “dare to provoke it.”

The “progressive” class disagrees. It believes we can dampen the threats by sharing even more of our wealth and putting faith in diplomacy. All in the name of “fairness,” they chase a European model, redistributing wealth and social spending at defense’s expense, even though that approach is bringing European countries to the brink of economic crisis.

Trying to spend their way out of recession hasn’t worked for Europe. It won’t work on this side of the Atlantic either. The U.S. already has fallen from the ranks of the economically free in The Heritage Foundation/Wall Street Journal Index of Economic Freedom. If we continue to shed our free market tradition and allow burgeoning debt to crush the American dream, we will likely lose our standing as the tenth freest economy in the world in 2013.

This downward trend in economic freedom does not bode well for Americans. The Census Bureau reports real median household income in 2010 was 6.4 percent less than in 2007, “the year before the most recent recession.” A Harris Interactive survey found 77 percent of Americans living paycheck to paycheck in 2010, up from 43 percent in 2007. Labor force participation in the U.S. is at a 30-year low. The Heritage Foundation’s 2012 Index of Dependence on Government reports one in every five Americans significantly dependent on government aid.

Washington is struggling to pay its bills. Federal debt increased more during President Obama’s first three years than under the 41 presidents from George Washington to George W. Bush combined. Total U.S. public debt will soon surpass $16 trillion—or $50,000 for every man, woman, and child in America. That amounts to about 70 percent of everything we produce today, but it could hit 195 percent within 25 years. That means each of us would owe over $100,000 to the federal charge account. That is simply unsustainable.

We know the way to prosperity. We just need the will to take it.

The Will to Prosper

If the path to prosperity is not more government spending, meddling, and regulation, what must we do to become prosperous again?

First, we must get our fiscal house in order. That means solving the debt crisis, because nothing more pervasively undermines our prosperity, security, and economy.

Second, we need to cut the size of the federal government. Left unchecked, it will consume as much as one-third of the U.S. economy by the time babies born today graduate from college.

Further, we need a simple and fair tax system. We need to enable people to save and invest more, so that fewer Americans are dependent on the government. We must reform social entitlements, which are on track to consume all federal revenue within a few decades.

We need secure markets abroad, freedom of the seas, and free trade agreements with countries that will play by the rules.

We must ensure a robust national defense. That is the first responsibility of the federal government, and essential if we want to preserve our liberty and our prosperity.

These steps and more are explained in a Heritage report aptly titled Saving the American Dream. Unless we take up the cause of securing the blessings of liberty we have inherited, the American dream will become merely the stuff of stories. That would be a real tragedy for generations of Americans to come, and people worldwide.

Just as Freedom is Not Free, Prosperity is Not Guaranteed

Liberty is indispensable for a good and prosperous life. But freedom is never free. Its disappearance, as Reagan counseled, is never more than one generation away. All of us—not just our politicians—must be vigilant, determined to safeguard liberty and the American Dream. And that means understanding that the foundation of American prosperity rests in economic freedom.


Kim Holmes

Former Executive Vice President