“The End of Prosperity” details the brutal assault on the American economy by politicians, both Republican and Democrat. Written by by Arthur Laffer, Steve Moore, and Peter Tanous, this has the summary of chapters 4, 5 and 6. The rest of the chapters will follow soon. The previous chapters can be found here.
After the summary is complete (in a few days), I will follow-up with my review and a critique. Not to spoil the ending, but it’s a great book with lots of numbers, facts and statistics. The problem with statistics and numbers is they can be viewed in any of a hundred ways as I’m sure their critics do.
Third, my next book to do will probably be a left-wing book as this is a right-wing book and I want to keep it fair. I’m planning on doing The Audacity of Hope of Barack Obama as that seems a good balance to this one.
• Book Summary •
The End of Prosperity
How Higher Taxes Will Doom the Economy- If We Let It Happen
The four stooges (of presidents in terms of the economy) were: Johnson, Nixon, Ford, and Carter
Johnson dramatically increased both wartime spending and domestic spending. He created a welfare state that punished work and incentivized unemployment. We paid people to drop out of school, have kids out of marriage, get the father out of the house, not work and to hide any money they did earn. – Then he increased taxes to fund the war. Revenue grew, but slower than after Kennedy’s tax cuts.
Nixon strangled the economy with regulation. He went off the gold standard which wrecked the us dollar, dropping it from 35$ per ounce to $850. He increased tariffs and instituted price controls. It was all a failure. Unemployment doubled under his watch.
Ford taxed the oil companies and added price controls. This exasperated the energy problems. He asked people to where Whip Inflation Now buttons, but clearly misunderstood how to combat inflation.
Carter had promised to restrain the budget, instead he let the deficit double in his first year. High inflation drove people into higher tax brackets. And worse, most taxes at all levels of government had been slowly creeping up. In 1965 the most someone could pay in social security tax was $174. By 1982 it was $2191. Average taxes for a couple with two kids increased from 13.7% to 20.9%. The top marginal tax rate was now 77%.
During the energy crisis he raised taxes the oil companies and added more price caps to oil.
- US oil production dropped from 11 to 9 million barrels per day (despite us being in a oil shortage)
- Oil consumption increased from 15 to 19 million per day
- We increased foreign oil usage from 4 to 8.5 per day.
As inflation raged Carter pushed the Fed to drop the interest rate, pushing inflation even higher. He doubled the inflation rate from 7% to 14.5% in two years. The mortgage interest rate hit 21.5% and home building ground to a halt. This lead to Carter’s Malaise, he became America’s biggest pessimist watching as the economy tanked, the voters removed him from office.
Chapter 5: The Twenty-Five Year Boom
Ronald Reagan walked into a fiscal nightmare. Despite enormous pressure and critism, but with the support of author Laffer and Alan Greenspan, he pushed for supply side economics. The economy got worse.
The tax cuts were spread over three years. As Laffer said, “Why shop today if you know there will be a sale tomorrow”. But dropping many regulations and gas price caps dropped the misery index (unemployment + inflation) from 21 to 15 in two years. It fell (and stayed) below 10 throughout his time in office.
When his tax cuts finally came, the economy started a 25 year boom that has grown 97% of the time. Foreign capital poured into America, instead of out as was the trend.
In just one year Reagan and supply side tax cuts along with reducing government intervention, slower growth in spending, and increasing free trade turned around the flailing economy. Instead of hurting the poor, by the end of his term the poorest Americans (less than 30k) paid between 79 and 134% fewer taxes. The stock market rebounded, millions of jobs were added, and family real income increased.
Chapter 6: What Bill Clinton Could Teach Barack Obama
Reagan’s Veep George Bush campaigned as “Reagan’s third term”. Then he raised taxes and lost the election to bill Clinton.
But worse, the tax cuts dropped revenues (as a percent of GDP), the deficit doubled (it was falling under Reagan). They then added a luxury tax of 10% to yachts, jewelry and private planes. The result was 9500 unemployed yacht builders. Two years later the tax was repealed with liberals at the forefront.
It’s the economy stupid.
Clinton nominated Alan Greenspan, Reagan’s supply side adviser to chairman if the Fed. He raised taxes, but his top marginal rate of 39.6 was still much lower than the 70 it had been.
The tax raise did nothing to increase revenues. Two years after his tax raise the congressional budget office still predicted a 200billion a year deficit. What changed was Republicans winning in the midterm and slashing the budget and Clinton returning to the “New Democrat” tag that got him elected. With neither party in power no one was able to dramatically increase spending on their pet projects.
Clinton then backed NAFTA saying “we must compete, not retreat.” In 1994 a person in New York City would have to earn $45,000 a year to make enough money for it to pay to get off Welfare. He dropped the number of people on Welfare 58%. The income for the bottom fifth of America grew faster in that time than any other income group. Overall spending growth was lower under Clinton than any other president since Calvin Coolidge. Bill Clinton got it wrong with raising taxes, but he got it right with almost everything else. In his time the DOW raised from 3,800 to 11,000.
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