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February 2017 Policy Study, Number 17-1


The Great Recession and the "New Normal" Economy


Can Anything Be Done to Restore Economic Prosperity?



In Saving Congress from Itself: Emancipating the States & Empowering Their People, James L. Buckley, a retired United States Senator and former judge on the United States Court of Appeals for the District of Columbia Circuit, argued that “the United States faces two major problems today: runaway spending that threatens to bankrupt us and a Congress that appears unable to deal with long-term problems of any consequence.”[17] This is in addition to the erosion of federalism by an ever-growing, powerful federal government that has turned the states into mere administrative districts.


The federal budget, which is currently $4 trillion, is symbolic of the out-of-control spending. The national debt is approaching $20 trillion, and deficits are projected to rise in the coming years. The fiscal crisis is dividing the nation, as well as both the Republican and Democratic political parties. Although both political parties share in the blame for causing the fiscal crisis, they each offer different solutions for resolving this major public policy problem. At the heart of this issue are different philosophies on the role and responsibility of the government toward the people. Fundamentally, this is a debate over our Constitution.


This fiscal crisis is not just caused by reckless spending, but also by the unfunded liabilities of entitlement programs such as Social Security, Medicare, and Medicaid. Jeffrey Miron, Director of Economic Studies at Cato Institute, wrote that “many recent policy changes have worsened the U.S. fiscal situation.”[18] Miron wrote:


These changes include the creation of Medicare Part D ($65 billion in 2014), new subsidies under the Affordable Care Act ($13.7 billion in 2014), the expansion of Medicaid under the ACA (from $250.9 billion in 2009 to $301.5 billion in 2014), higher defense spending (from $348.46 billion in 2002 to $603.46 billion in 2014), increased spending on veterans’ benefits and services (from $70.4 billion in 2006 to $161.2 billion in 2014), and greater spending on energy programs (average annual spending was $0.52 billion over 1998 – 2002 but $11.43 billion over 2010 – 2014).[19]


Miron argued that a “key policy lesson” from this fiscal crisis is that in order “to avoid a fiscal meltdown in the next few decades, the United States must slow the growth rate of federal expenditures, especially on health care.”[20] Michael Tanner, a Senior Fellow at Cato Institute and author of Going for Broke: Deficits, Debt, and the Entitlement Crisis, noted that the costs of the unfunded liabilities of entitlement programs exceeds $90.5 trillion, and these programs “alone account for 47 percent of federal spending today, a portion that will only grow larger in the future . . .”[21] This means that the increase in the cost of entitlements, along with interest payments on the debt, will place greater pressure on the federal budget. This is why the national debt and the fiscal crisis is arguably also one of our greatest risks to national security.


This fiscal crisis also represents a crisis of liberalism. As columnist Terry Jeffery wrote, “Since the 1930s, the liberal vision of the welfare state, where a growing percentage of the population is dependent on the government, has been transforming America.”[22] The welfare state, which had its creation in President Franklin D. Roosevelt’s New Deal, was greatly expanded under President Lyndon B. Johnson’s Great Society. It has continued to expand in the aftermath of the 1960s and has led directly to this crisis. “Now Americans can collect, among other federal benefits, Social Security, Medicare, Medicaid, disability insurance, food stamps, and Obamacare subsidies,” wrote Jeffery.[23] This is why reforming entitlements must be a top priority to preserve these programs for not only those who have and are paying into these entitlements, but also to avoid bankrupting the federal government.


Although Republicans and Democrats can share in the responsibility for creating this fiscal crisis, a larger portion of the blame must fall on liberalism, a philosophy which calls on the federal government to assume greater control of almost all aspects of American life. President Barack Obama, for example, has set new records of uncontrolled spending with little progress to demonstrate the necessity for that spending. As Terry Jeffery wrote:


While America has seen no great economic growth over the past decade, it has seen great growth in the federal debt. When Bush was inaugurated to his second term on Jan. 20, 2005 — in that last year when the American economy grew by more than 3 percent — the total federal debt was $7,613,215,612,328.37. Four years later, on Jan. 20, 2009, when Obama succeeded Bush, the debt was $10,626,877,048,913.08. That means the debt grew by $3,013,661,436,584.71 — or an average of $753,415,359,146 per year — in the second term of the last Republican president. As of Monday [February 8, 2016], the federal debt was $19,000,235,912,585.65 — having thus far grown by $8,373,358,863,672.57 during Obama's presidency. As the federal debt has climbed, household incomes have not. According to the Census Bureau's Table H-6, real median household income peaked in 1999, when it was $57,843 in constant 2014 dollars. In 2014, the last year reported, it was $53,657.[24]


What we have seen to this point is that the federal government is spending trillions without much result. Our economy is in the worst recovery in recent history, and more Americans are dependent on some form of governmental assistance. Policymakers should consider some reforms that will address both the fiscal crisis and reduce the economic misery of the people. Some of these reforms include tax and regulatory reform, which would provide a stronger economic stimulus than the tried and failed economic stimulus of federal government spending money in order to get the economy working.


Policymakers need to learn from history and realize that following the traditional Keynesian-style stimulus spending does not work. It did not work for President Franklin D. Roosevelt’s New Deal, nor did it work for President Barack Obama in the Great Recession. Policy reform should be rooted in the following principles:


    • Tax reduction and simplification
    • Eliminating unnecessary and costly regulations
    • Spending reductions
    • Entitlement reforms (including health-care reform)
    • Monetary reform — avoiding future quantitative easing policies of the Federal Reserve and instead seriously considering a return to the gold standard to strengthen the dollar

Any tax reform should require making the tax structure more simple and fair. The flat tax and the national sales tax should be considered as serious ideas for reforming our current out-of-date and complex tax code, which benefits special interests. Congress should also lower the corporate tax rate, which is one of the highest rates in the industrial world. A lower corporate tax rate would be a beneficial stimulant to the economy. Proper and moral tax policies should not harm individuals and businesses, but encourage economic growth while providing resources for needed government programs. As Steve Forbes and Elizabeth Ames argued:


Taxes are necessary to pay for critical government services. But excessive taxation undermines the common good. Overly high taxes keep individuals from building personal wealth and advancing in the economy. They deprive society of the capital needed to fund investment in new business and jobs. History shows that, time and again, tax cuts, by unleashing economic growth, have generated more — not less — money for government.[25]


There should also be regulatory reform, and businesses should be freed from regulations that are unnecessary and hinder economic growth. It should also be noted that tax cuts must be accompanied by spending cuts in order to avoid deficits and further borrowing. It is clear that we cannot tax our way out of this problem.


If tax and regulatory reforms are not difficult enough, policymakers will have to find ways to cut spending and reform entitlements. At this time, it appears unlikely that reform will occur in these two areas. As already noted, the nation faces an enormous fiscal crisis because of out-of-control spending and the growing costs of entitlements. This also includes reforming health care, as this is a leading factor in driving government spending. The healthcare crisis is one of the largest public policy problems confronting the nation today, and many Americans are faced with higher insurance premiums and higher deductibles, which make it difficult for people to pay for health insurance and medical care. In addition, because of the Patient Protection and Affordable Care Act, more people are being pushed onto Medicaid, which is crushing state budgets. “Efforts in the United States and other nations to make health care more available and affordable have helped only to drive up prices and lead to rationing,” wrote Steve Forbes and Elizabeth Ames.[26]


Cutting government spending, reforming entitlement programs, and bringing more free-market reform to health care will be essential to avoid a total fiscal collapse. As Terence Jeffrey argued:


America is moving toward a fiscal crisis because over the past eight-decades — beginning with the presidency of Franklin D. Roosevelt — Congress has created and sustained programs that make increasing numbers of Americans dependent on government for key elements in their life (including income and healthcare).[27]


Something can be done to restore economic prosperity and reduce the economic misery of Americans. The policy problems we face today are very complex, and solving them will take political courage. The last president to try and seriously limit the federal government and challenge the New Deal-Great Society legacy was Ronald Reagan. Although Reagan failed to limit the federal government, he was successful at creating a period of economic growth and moving the nation in a more conservative direction. In addition, it was the Reagan-inspired Republican Congress, under the leadership of Speaker of the House Newt Gingrich, which forced President Bill Clinton to sign the historic welfare reform legislation and to balance the budget in the 1990s. These were two historic accomplishments.


The question for today is whether there is a possibility for a compromise on solving our policy problems today, just as the Republican Congress and President Clinton came to a compromise on welfare reform and the budget. America is a divided country politically, economically, and socially, and it is not clear if agreement can be found. President Barack Obama and much of Congress rejected the fiscal recommendations of the Bowels-Simpson Commission, which was a bi-partisan study group charged with the task of finding a way out of our fiscal crisis.


“With spending on the four biggest budget items — Medicare, Medicaid, Social Security, defense — rising, and GDP growing at 1 percent, future deficits will exceed this year’s projected $600 billion,” noted columnist Patrick J. Buchanan.[28] As Buchanan stated, “National bankruptcy, then, is among the existential threats to the republic, yet, we drift toward the falls, with the issue not debated.”[29] For example, both major political party presidential candidates are offering ideas on taxation (raising or lowering rates) and ways to spend more money, but they are not offering suggestions or ideas on how to reduce spending. Policymakers can no longer afford to ignore this issue or pass the buck to a future Congress or President, and the American people at the same time have a responsibility to urge their elected politicians to work toward solving these problems.


In order to change the situation, the nation will need to look toward free-market reforms and not the failed policies marked by government intervention and socialism. As Steve Forbes and Elizabeth Ames argue:


Bottom line: the best way for government to stimulate an economy is to make it easier for economic activity to take place. That means promoting a hospitable environment through protecting the rule of law and property rights, instituting low taxes, ensuring sound money, and removing obstacles to starting and building a business. These very simple steps would help to unleash the resources and brainpower of millions of people. There energy and know-how would do more to galvanize our economy than any governmental stimulus.[30]


The past decade has provided enough evidence that our current policies are not the solution. People are suffering and need a stronger economy to provide them with solid-paying jobs and a stable income to provide for themselves and their families. If we do not change course, the suffering will only become worse.




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