Inside the GOP’s Tampa convention hall this week, one prominent feature is a debt clock ticking toward $16 trillion. With due respect to that horrifying number, it’s the wrong figure to watch. What Mitt Romney and the GOP need above all is a growth clock and a persuasive case for economic revival.
Most Americans have concluded that Obamanomics is a failure, but polls also show that independent voters remain skeptical that either party has an answer to the malaise of the Obama and latter Bush years. This cynicism plays into the hands of President Obama, who is trying to convince Americans that 1.5% growth and 42 months of more than 8% unemployment is the best we could have expected.
Our view has long been that Republicans have the best chance of winning when they make the growth message their top priority. That’s especially true this year. The Reaganites had it right: Rapid economic growth causes the deficit and debt to fall, not the other way around.
Without a sustained recovery in national output to 3% growth or more and without putting millions more Americans back to work, there is no politically feasible spending reduction or tax increase that could balance the budget even if Ron Paul ran Congress. Tax revenues have remained below 16% of GDP for the last four years because the economy is in a slow growth rut. The growth deficit, not the budget deficit, is the great issue of our time.
The Reagan years offer an instructive history, because the economy’s troubles in the 1970s and the steep drop in real middle-class incomes (some $4,000 per household since 2009) were so similar to today’s. Reagan put pro-growth tax cuts and a rebuilt military ahead of his ambitions to balance the budget, and he was right.
After his tax cuts fully kicked in on January 1, 1983, annual growth averaged some 4% over five years, while employment gains were swift and long-lasting. The deficit fell in half from a peak of 6% of GDP in 1983 to under 3% in 1989.
The temporary surge in federal borrowing that the media fretted so much about at the time was dwarfed by private asset and wealth gains as national net worth doubled. Annual tax revenues soared to nearly $1 trillion in 1989 from $517 billion in 1980 with much lower tax rates.
The pattern continued in the 1990s, after the mild recession of 1990-91 and a decline in the rate of growth in the Clinton tax increase year of 1993. The real reasons the budget balanced by the end of that decade were the peace dividend after the Cold War ended, spending restraint mid-decade after the GOP took Congress in 1994, and above all another burst of economic growth. Revenue surged into the Treasury from 1996-2000, including a wave of capital gains after the tax rate was cut to 20% from 28% in 1997.
Even the last decade produced a revenue surge after the much-maligned 2003 investment tax-rate cuts—the rates Mr. Obama wants to raise. Revenues increased in nominal dollars by more than in any previous four-year period until the housing bubble burst.
Consider what would happen if economic growth increased today to what it would be in a normal economic expansion—about twice what Mr. Obama has delivered. That return to prosperity would raise far more revenue for Uncle Sam than the panoply of Mr. Obama’s planned estate, capital gains, dividend and income tax hikes.
The Congressional Budget Office estimates that each increase of 1% in GDP means $2.78 trillion more in revenue over a decade. Nearly every problem known to man is more solvable with a larger economy—and what better gift to leave our heirs.
This is not to say that cutting spending and reforming entitlements aren’t necessary or economically beneficial. The Obama era is different than the Jimmy Carter days because the baby boomers are that much closer to retirement and health-care spending has increased enormously. Our debt burden as a share of the economy is also higher.
So spending restraint is crucial. Under Mr. Obama, federal spending has taken between 24% and 25% of GDP for four years, higher than the recent average of about 19% or 20%. This spending share will rise rapidly once ObamaCare kicks in and if Mr. Obama’s other budget priorities prevail.
Mr. Romney is promising to reduce spending to 20% of GDP over time, which means taking it back to where it was in 2007. This is achievable. Meanwhile, Paul Ryan’s Medicare reform offers the promise of slowing the increase in health-care spending in the long run.
But none of this will be possible politically without the ballast of faster growth and rising incomes. And that is why Mr. Romney and the GOP need to resist what former Buffalo Congressman and supply-side evangelist Jack Kemp used to call “root canal” Republicanism. The road to revival doesn’t require a prescription of pain, suffering and tax increases. This brand of Republicanism repels voters, which is why it makes liberals cheer.
Messrs. Romney and Ryan have a defensible economic revival plan—marginal-rate tax reductions and reform, regulatory relief, sound money, and an energy policy to promote domestic production. American entrepreneurs, workers and investors will do the hard work. What they need to hear from Republicans in this election campaign are specific pro-growth policies and a message of optimism that they know how to regain America’s lost prosperity.
A version of this article appeared August 29, 2012, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: A Grand Old Growth Party.
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