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UnknownLast week in Kansas, President Obama laid out his vision of economic history. In example after example drawn from the last hundred years, he showed that interventions on the part of the federal government in the form of taxes and regulations have proven to bring the free-market system to its optimal best. Restraint on taxes and regulations, in contrast, has conduced to economic underperformance and inequality.

Let’s let the president speak for himself. Here were some of the claims in Kansas:

[T]oday, we are a richer nation and a stronger democracy because of what [Teddy Roosevelt] fought for in his last campaign [of 1912]: [including] political reform and a progressive income tax.

Now, just as there was in Teddy Roosevelt’s time, there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune….If we just cut more regulations and cut more taxes—especially for the wealthy—our economy will grow stronger….

Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government….And that theory fits well on a bumper sticker. But here’s the problem: It doesn’t work. It has never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible postwar booms of the ’50s and ’60s. And it didn’t work when we tried it during the last decade. I mean, understand, it’s not as if we haven’t tried this theory.

With these words, the president hung himself by his own rope. He is wrong on every count.

Let’s look at the past as it actually was.

There is one major inflection point in U.S. economic history. Before this point, growth was high, at about 4% per year for a century. Also in this period, there was remarkable price stability and so little unemployment that the nation had to import tens of millions of workers from abroad.

After this point, growth was moderate, at about 3% per year for the long term, with variations in the form of major depressions and recessions and a 23-fold inflation which had no like in the previous epoch.

This inflection point was 1913 – the very year which the reforms TR plumped for in his last campaign, the income tax and the Federal Reserve, came into being. 1913 marks the one secular shift in American economic history toward lower growth and more economic unpleasantness in the form of unemployment, inflation, and serial recession.

Had this nation grown at the 4%-rate achieved in the pre-1913 period, we would be twice as well-off today. As for inequality, unemployment and inflation are scourges to the working class, but not so much to the rich, and these are 20th– and 21st– century innovations.

Now about that 20th-century, the only reason its record came in even respectably is that at certain junctures, decided efforts were taken to withdraw the impress of the institutions of 1913, the Federal Reserve and the income tax.

The President says, “It didn’t work when it was tried in the decade before the Great Depression.” These would be the years 1921-1929, when on account of a tax cut put together in 1921, the economy boomed at 4.8% per year as unemployment and inflation (the latter recently on a 100% run) both collapsed. How does a president, in a major, prepared speech make such an indefensible factual error.

Next: “It’s not what led to the incredible postwar booms of the ’50s and ’60s.” No? The trough of the recession at the end of World War II was 1947, when the Republican majority in Congress conspired to win a tax cut over President Truman’s veto. Result: a 6-year run of 4.8% growth.

In 1953, when recession came, President Eisenhower resisted calls for another tax cut, and recessions came again and again such that Eisenhower left office in 1960 with a record of 2.4% annual growth on his watch. John F. Kennedy followed, as every schoolchild should know, with another big tax cut. The great 1960s boom ensued, with 4.9% growth from 1961 to 1969.

Two years ago, I happened to publish a book, Econoclasts, canvassing all this history. I also happen to know that the White House library has a copy.

I have to wonder what historical scholarship the president and his speechwriters are consulting as they come up with their strange counter-narrative of American economic history. I truly don’t know what the books could be.

After all, when the major library bibliographical service, Choice, reviewed Econoclasts, it said the book “fills a gaping hole in the literature.” Has there been some new revisionist history of the effects of tax cuts since 1913 that validates the president’s new narrative? If so, no one’s ever heard of it.

Then again, you can find the stuff the President reiterated in Kansas here and there in left wing redoubts, Berkeley, California and the like – on bumper stickers.

Books on the topic discussed in this essay may be found in The Imaginative Conservative BookstoreOriginally published at the essay is reprinted here with gracious permission of Brian Domitrovic.

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5 replies to this post
  1. My medical relatives warn that if you go to a surgeon he will recommend surgery, while a specialist in internal medicine will push pills and a shrink will want you to talk. Hence Mr Obama always prescribes more government. (Good piece. Thanks)

  2. Ive already had this discussion with many leftist friends who have touted Obama's reiteration of TR's socialist ideals. You're right. Obama was wrong on every account.

    As I understand it, it was not only congress's tax cut, but the massive influx of soldiers returning from war in 1947 only to find few jobs. So, they bought surplus army buildings and army cooks started greasy spoon diners, mechanics started repair garages, etc and hired waitresses and fellow mechanics. That was what lead to us getting back to a normal unemployment rate and pushed the economy into the 1950's boom.

    Point being, the depression didn't officially end in 1939, but 1947. And it was on the back of businesses, not government.

  3. How would the author of this article respond to some of the points that John Medaille has raised?

    I don't know very much about economics, but he has raised the point that currently the government creates what he called "equilibrium" in the economy, which creates stability and growth. We have come to expect growth and stability so much, that to go back toward a truly free market (the title of a book of his) would be unacceptable to most people who are advocating for it. Before the government established or created the "equilibrium" the economy was in recession something like 40% of the time.

    It sounds like Obama is saying something that starts with similar premises. I don't agree with him, but I would like to have an answer to what Medaille is saying. Is he wrong?

  4. I don't doubt what you say, but don't get too worked up about Choice. Even I've written for that magazine. Just a collection of reviewed books with opinions on whether librarians should purchase.

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