Republicans Must Capture Economic History to Show Keynesian Policy Does Not Work

Going into the 2010 elections, the GOP must adopt a pro-growth strategy that not only reduced long term debt but encourages long term job creation. There is agreement among many economists, left and right, as well as many of our allies that the stimulus program and increasing government spending is not working. We're laying the ground work for slower economic growth in the midst of increasing government debt. That is the best long term scenario.

Even economists on the left, such as Paul Krugman, have mused out loud that the present economic plan is failing and leading us into the abyss. Krugman has already stated that we are in the midst of a lost decade similar to the Japanese experience of the 90’s. (In fairness to Mr. Krugman, lest we accuse of him of being a supply-sider, he has called for even more government spending since, in his opinion, the one trillion on stimulus spent since 2008 has not been enough.)

The first thing needed is to rescue economic history since we have clear records on what works and what does not work in economic downturns. Warren G. Harding, one of the least respected Presidents, managed to get the United States out of a serious recession after World War I. His policy of lower taxes and reduced government spending led to a decade of economic boom. (Harding was one of the few politicians who exercised modesty. He did not consider himself a genius or the brightest guy in the room but he was smart enough to realize his limitations and that of government.)

Herbert Hoover, one of the most respected politician of the 20’s, did the complete opposite of the supposedly dimwitted Harding by raising taxes, raising already high tariffs and increase spending which turned a serious recession into a full scale depression. He was also sabotaged by the Federal Reserve whose monetary policy led to a deflationary cycle. Roosevelt's New Deal lead to low growth throughout much of the decade and FDR managed to provoke a depression within a depression in his second administration.

In the 70’s, the Republicans, under Nixon, increased spending and followed Keynesian ideology by deficit spending and devaluing the currency. This lead to a decade of stagflation in which a severe recession highlighted the middle of the decade and inflation soared as the 80’s began. Nixon declared at the beginning of the decade that “We are Keynesian” but by the end of the decade, Keynesian ideas could not solve the problem of stagflation.

The Obama Keynesian theology is failing for it is not leading to steady economic growth and the increased spending is putting America in debt. Canada is now outperforming the United States by reducing debt and selected taxes over the past decade. The Canadians understand what the present Democratic Party has failed to grasp, that it is the business sector that leads the growth. The first thing is for the GOP to recapture economic history by pointing to what has worked in the past.

Once the history lessons are learned, then it becomes easier to make policy. One key issue is the budget deficit. There are three ways to reduce deficits: increase taxes, decrease taxes and spending or decrease spending and raise taxes. If the Republicans win the house back, there will be a move to at least do the third option by forcing Republicans to make a deal; any decrease spending must be accomplished by tax increases. Note what won’t be included, any reversal of either stimulus spending or the health care. Any spending cuts most likely will begin and end at defense spending.

What the Republicans need to make clear is that any recovery begins with the permanent extension of the Bush’s tax cuts plus reduction in business taxes. Studies have shown that the reduction of businesses taxes and capital gain taxes lead to a greater bang for the buck than spending increases. (The IMF has estimated that for every one dollar increase, the economy sees a seventy cent return on investment. Contrast this to nearly the range of three dollars to eleven dollar return on business and capital gain tax cuts.)

As for tax cuts, Democratic Leftist Ron Wyden and Retiring Senator Judd Gregg have collaborated on a tax plan that would essentially extend the Bush tax cuts and lower business taxes (there are some Democrats that have conceded the importance to marginal tax reductions).

Right now, the "mainstream" Democrats are setting up a massive tax increases that will include the middle class. The budget commission is preparing the ground for new taxes that will reach into all pockets to hel offset the new increases in government spending and new programs like Obamacare. The Republicans need to present a vision that is growth oriented to contrast with the dream crushing vision of the Democrats. As of now government workers have been shielded from the worst of the recession so why not ask the question, why should the government profit while the private sector suffers?