Don’t Be Fooled by ‘Secular Stagnation’

American exceptionalism hasn’t come to an end, and we needn’t settle for 2% economic growth. What the U.S. needs is policies like Reagan’s, not Obama’s

By Phil Gramm and Michael Solon. Excerpts:

"If instead the economy grows an average of 2.6%, the Republican tax reform bill would not raise the deficit."

"From the end of World War II through 2008—including 10 recessions and the first half of the 11th one—the American economy grew on average by 3.4%. In only one period in the entire postwar era prior to the Obama presidency did the economy fail to grow by at least 2.6% for a decade—during 1973-82, when the economy experienced three recessions, four years of negative growth, and only 2.3% average growth. In every other decade from the end of World War II until the beginning of the Obama presidency, the economy grew by more than 2.6%."

"Given America’s historical economic strength, there is only one reason to question the ability of America’s economy to grow by 2.6% over the next decade: a belief that in the post-Obama era, America has fallen into what President Obama’s apologists call “secular stagnation”"

"During the Obama era of 1.5% growth, less than half the historical norm, was American exceptionalism lost forever?"

"If the Obama economic policy had been similar to the policy America had followed since the end of World War II, a case might be made that external forces ended American exceptionalism and ushered in secular stagnation. But not only did economic policy change radically during the Obama era; the U.S. implemented the very policies generally identified as impeding growth in Europe: high marginal tax rates, government domination of key industries, reduced efficiency in the labor and capital markets, and a weakening of regulatory certainty and the rule of law. Labor productivity lagged as new investment barely managed to offset depreciation, and increases in government benefits caused a precipitous decline in labor-force participation beyond anything that could have been expected from demographic changes alone.

No one was proclaiming any secular stagnation when the CBO, the Office of Management and Budget, and the Federal Reserve all projected after the recession ended in mid-2009 that a strong recovery would follow, with growth averaging between 3.4% and 4.2% during 2010-13. As Obama policies shackled the recovery, the growth rate withered to 2%. Even when taxes were raised in January 2013, the CBO predicted a 3.7% growth rate for the subsequent three years. The same Joint Committee on Taxation that now says the Republican tax reform will not stimulate growth projected that the Obama tax increase would raise $620 billion in new revenues over the following decade. Instead, growth slowed to a 2.3% average, slicing projected revenues through the end of Mr. Obama’s term by $3.2 trillion. Revenue losses due to slower growth were five times the projected revenue increase that was supposed to flow from the 2013 tax hike.

When President Reagan claimed his tax cuts would generate 4.4% growth for five years, the projection was almost universally derided as a “rosy scenario.” But even though the economy fell into a recession before any Reagan tax cuts took effect, and even though the tax cuts were phased in over three years, the economy actually grew by 4.42% for the six-year period from 1983 to 1988."

"The economy averaged 3.8% growth during 1987-89, almost a full percentage point higher than the 2.9% growth the CBO projected right after the 1986 tax reform passed."