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Optimism wins

By Daniel M. Ryan
web posted June 13, 2011

Given how bad the economy is in America, it's not surprising to see conservatives going into doomsaying mode again. The recovery, such as it is, is faltering; gas prices reached $4 a gallon; inflation is moving up; fewer and fewer jobs are being added by the private sector. Even Wall Street is catching on as QE2 comes to an end. After reaching 1,360 at the beginning of May, the S&P 500 has fallen below 1,280. Gold, although well below its record high of $1,578.20, is still above $1,530.

Moreover, the bad news can be attributed to the policies of President Obama and the until-recent Democratic Congress. Remember the stimulus? All those "shovel-ready" jobs that didn't materialize? The prediction that the unemployment rate would peak at 8% with the stimulus being passed? Yep, the Obama Administration and Democratic Congress have fallen short of their promises. The U-3 unemployment rate is back above 9%. First-quarter GDP growth, after some prior pick-up, was only 1.8%. Talk of a descent into a new recession is more and more credible. The Obama Administration blaming President Bush is less and less credible, down to the shame point. Austan Goolsbee, chair of the Council of Economics Advisors, resigned. He's the second chair to go, after Cristina Romer quit last year. For those who had to endure President Bush being blamed for the '08 crisis, the tables have definitely turned. It's now President Obama in the hot seat.

Doomsaying, combined with Obama-blaming, does work now. That said, I want to point out that negativism – fuelled by justified complaints about government policy – is on its way to becoming an end in itself. Becoming addicted to it, no matter how well-put or justified it is, runs the risk of forgetting to come up with alternatives that would lead America to better times. 

Optimism wins. Ronald Reagan, when the Republican candidate in 1980, did attack President Carter for bad economic policy. Many don't know this, but the "Misery Index" was first used by the Carter forces in 1976 against then-President Ford. Candidate Reagan was so effective at turning President Carter's weapon against him, it became known as the Reagan Misery Index.

But, that was only part of the package. A lot of Reagan's campaigning expressed optimism about America's long-term prospects. He promised supply-side tax cuts to get the economy rolling again. He also promised energy deregulation, plus an end to a "windfall profits" tax, to get energy prices down. Even though Jimmy Carter was an easy target, not just because of America's poorly-performing economy, Reagan did not give in to the temptation to run a primarily negative campaign.

Now that economic growth in the United States had fallen below trend, now that America is enduring a subpar recovery, it's time for Republican candidates to get back to the shining example of Ronald Reagan and highlight policies that will being American back to morning.

Growing out of a recession as intractable as the last one does seem daunting, but the twin problems of inflation and taxation made a return to high growth seem impossible in 1979. Many doomsayers at the time, preferring to cast a plague on both the Republican and Democratic houses, said so repeatedly. High inflation was believed to be endemic, an inevitable consequence of a political system beyond repair. That's the kind of attitude that too much doomsaying inculcates.

Although the 1981-82 recession was bad, the path to high growth was cleared once it was over. Thanks to supply-side economic policies and energy deregulation, and Fed chair Volcker breaking the back of double-digit inflation through restraining monetary growth, growth jumped back up and unemployment fell.

Even if there is a long-term upper limit to U.S. economic growth, the current fall below trend leaves a lot of room for catch-up growth – provided that the right policies are implemented. As the 1980s showed, supply-side policies do the trick. If they worked once, why would they not work again?

Of course, 2011 is not 1979; there are other problems looming that are much worse now than in the 1970s. The national debt is much larger, and kicking the can down the road is becoming more difficult. The U.S. economy is bedevilled by regime uncertainty, much more so than in 1979. At the end of the 1970s, the Boomer retirement bulge was far off in the future; now, it's here. A lot of the points that doomsayers have made are valid; they should not be dismissed out of hand.

It's one thing to give doomsayers their due. But, it's another thing entirely to buy into their perma-pessimism. Economic doomsayers, although their research does reinforce the case against President Obama, are like the energy doomsayers who insist that getting the government out of the way of drilling will solve nothing. Pessimism, if unchecked, leads to despair.

Even if the problems America faces are as intractable as doomsayers claim, even if there's only so much growth even excellent policy can induce, supply-side remedies will help mitigate the hard times America will go through – just like "drill, baby drill" will mitigate any future oil shortages. More importantly, an active supply-side policy will show Americans an Administration that's willing to proactively remove obstacles to economic growth. An Administration that refuses to slack off from the challenges of the day. Something, after all, is better than nothing.

It's becoming clear that the Obama Administration is running out of ideas. Some conservatives may object to hoisting the supply-side flag too soon because they're afraid that the Obama Administration will co-opt any Republican pro-growth plan and use it to win re-election. These are people who believe, not without cause, that President Obama will do or say anything to remain in office.

What if he does renounce everything he said in the 2008 campaign and go supply-sider? What if he does urge Reaganesque cuts in marginal tax rates, get them enacted, and sign them into law? Wouldn't that leave the Republican candidate without any ground to stand on? Wouldn't it lead to Obama being re-elected?

There is that chance, but everyone knows which party takes the walk on the supply side. Obama would be acting against his entire base if he does so. He's already caused disgruntlement by backing away from his anti-war promises, to the point where his term has been called Bush's third. He can only go so far before his base revolts.

Consequently, there's no real need to worry about he filching a solidly-researched pro-growth platform of supply-side cuts in marginal tax rates and relief from overregulation of non-financial industries. Not only would he doing so contradict the bulk of his own words, but also it would mean alienating and even angering a much larger part of his base. The Democrats aren't that chameleonish; neither is he.

So, there's little reason to fear the unveiling of a conservative-compatible recovery plan. The best reason for doing so is to show the American voters that conservative Republicans do care about the economy, and are a lot more than negative-minded critics and carpers. ESR

Daniel M. Ryan is an occasional contributor to The Gold Standard Now, and currently watching the gold market. He can be reached at danielmryan@primus.ca.


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