A Kennedy/Reagan Style Stimulus

A Kennedy/Reagan Style Stimulus Package
By Dr. Timothy G. Nash and Dr. Keith A. Pretty

Earlier this year the Obama administration pushed through Congress its $787 billion stimulus package amid dire predictions for the US economy. The package was designed to get America working and keep unemployment below 8.5 percent. Now, with unemployment at 9.5 percent and predicted to go higher, Vice President Biden has seemingly opened the door for another round of government spending, stating he believed the White House underestimated the severity of “the worst economy since the Great Depression.” Yet President Obama’s own Labor Secretary, Hilda Solis, said recently that much of the stimulus money was moving slowly, especially construction projects. The glacial pace of approval has led to only 10% of the stimulus package being spent to date. At this rate, it will be three years before the entire package makes its way into the economy. Meanwhile more than 3.4 million jobs were lost to the U.S. economy so far this year. U.S. Congressman Eric Cantor (R-VA.), stated that the purpose of the Obama administration stimulus package was to preserve, protect and create jobs and “it has failed miserably.” Considering the above, why has the president’s stimulus package had less than intended results?

The Problem
The problem is not, as Mr. Biden would have us believe, that the government didn’t spend enough, or that government bureaucracy is slowing the pace of stimulus spending, which it is. Instead, failure rests with a package that didn’t cut taxes enough or in all the right places. People have little confidence in government spending as a catalyst for economic growth and long term prosperity. They know that business creates jobs, and that the government largely creates taxes and regulations, and spends. The U.S. economy is burdened by onerous regulations, the third highest corporate income tax rate (39.27%) in the world, and a personal income tax rate that can reach 35 percent.
Despite all the money coming in, the U.S. national debt is now $11.2 trillion dollars, or 78 percent of U.S. GDP, and will likely be above 100 percent of GDP by the end of next fiscal year, surpassing the 1949 level of 97.5 percent which included costs associated with World War II and post war reconstruction. Many key U.S. competitors have much lower national debt-to-GDP ratios with China at 21 percent and Russia at 10 percent. By comparison, the next stimulus package this economy needs is not more of the same but a massive incentive-based tax cut to allow the U.S. to be competitive globally—currently we are not! The Russian economy has out-performed the U.S. over the last 5 years with a smaller national debt-to-GDP ratio, often friendlier regulations, a corporate income tax rate of 24 percent, and an average personal income tax rate of 13 percent. The U.S. has higher corporate and personal income tax rates than Canada and Mexico, as well as much of the industrialized world. The accounting firm KPMG reported that the global average corporate income tax rate for all countries in 2008 was 25.9 percent with the EU average at 23.2 percent, the Latin American average at 26.6 percent, the Asia-Pacific average at 28.4 percent and the OECD average at 26.7 percent.

The Solution
It seems that the presidencies of John F. Kennedy and Ronald W. Reagan serve as strong cases for the effectiveness of tax cuts in stimulating economic growth during difficult times. Recall what President Kennedy said about his own tax-cut based stimulus package in 1962: “In short, to increase demand and lift the economy, the federal government’s most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures.” President Kennedy’s tax cut was implemented after his death by President Johnson in 1964, with personal income tax rates declining 23.1 percent for the top income earners and 30 percent for the lowest. Corporate income tax rates were reduced by 9.6 percent the same year. The economy responded with an average annual real growth rate of 4.65 percent in U.S. GDP from 1963 to 1968, and unemployment dropped from 6.6 percent in 1961 to 3.7 percent in 1968. President Reagan’s across-the-board tax cut of 25 percent was phased in from 1981-1983 and helped bring the U.S. economy out of the severe economic recession of 1981-82 which saw the prime interest rate peak at 21.5 percent in 1981 (the highest since the Civil War), real GDP decline by 2.2 percent in 1982, and unemployment reach 10.8 percent also in 1982. The economy responded with an average annual real GDP growth rate of 3.87 percent from 1982 – 88, unemployment declined to 5.4 percent by 1988, and real tax revenue grew by 25.5 percent from 1983 to 1988. Finally, it should be recalled that average government spending exceeded average tax revenue growth by 4.22 percent for most of the 1980’s, thus creating the budget deficits of the Reagan years and hopefully providing a lesson for today’s policymakers?

Dr. Keith A. Pretty is president and CEO of Northwood University in Midland, Michigan.

Dr. Timothy G. Nash is vice president for Strategic and Corporate Alliances and holds the David E. Fry Chair in Free Market Economics at Northwood University.

Marijuana: The Real Stimulus Package

Muaz Halees

We need to legalize marijuana. I’ll wait for all the supporters and detractors to rid themselves of superfluous comments.

(Waiting.)

(Waiting.)

(Waiting.)

Now that we’re all ready to have an intelligent conversation about marijuana, I would like to continue. Legalization will improve a number of health, social, and economic issues we currently face as a society.

Let’s start with the numbers compiled by Harvard Professor Jeffrey A. Miron.  He asserts that “$7.7 billion per year in state and federal expenditures on prohibition enforcement would be saved and if it were taxed similarly to alcohol or tobacco, it would generate as much as $6.2 billion annually.”  You should probably re-read that last sentence to accurately grasp the potential profits available if legalization is realized.  This study does not account for the potential profit windfalls realized if the government serves as the sole proprietor of the marijuana industry, which would put the profits in excess of $30 billion dollars. 

Legalization would create two distinct revenue streams.  The companies that sell marijuana would have to pay income taxes and all sales of the drug would also be taxed.  The taxpayer money that is spent senselessly prosecuting marijuana offenders could be spent in a number of more efficient ways, or returned to the taxpayers.  The budget for drug enforcement may not have to be so large or could be re-focused on preventing far more dangerous sorts of drug abuse.  The jail space wasted on marijuana offenders could be better utilized to house real criminals. 

The war on drugs is a failure of nearly biblical proportions.  I am not employing hyperbole; in fact, I am actually understating the miserable results of this ill-fated war.  The only way to mitigate the losses incurred is by legalizing marijuana.  Prohibition has not prohibited anyone from acquiring marijuana, as evidenced by the 85% of high school seniors that admit to its use.  I don’t understand why we give credence to third party detractors on this issue while we routinely dismiss their moral and ethical arguments regarding the sale of cigarettes, alcohol, birth control, fur, caged chickens, or any number of other issues they decry. 

Opponents to legalization claim that its use causes crimes. This is a lie.  There is correlation between the two, but not causation.  Their argument is tantamount to claiming that abortions cause global warming.  Our prohibition of marijuana may actually be fueling the crimes associated with it.  Violence is used to resolve marijuana disputes because that is the only avenue available.  These violent methods were employed during the underground casino age and during alcohol prohibition.  The violence associated with these two industries decreased systematically after both industries were partially or completely legalized. 

Legalization of the drug would remove the pejorative connotation associated with it.  Scientists and doctors could research its health benefits without fear of castigation.  There may be more money allotted to researching those potential benefits.  Its legalization may also force parents to engage in serious, poignant conversations with their children on the topic of drug use.

The debate should take place, and the supporters of legalization should not be grouped into the same category as the potheads working at the local 7-11.  We are made up of a wide range of individuals, but most noteworthy are those in the economic field that support its legalization, such as Nobel Laureate Milton Friedman and a number of other economic visionaries. They signed a petition in 2005 extolling the financial virtues of marijuana legalization, so don’t be so quick to dismiss this argument. The arguments against legalization have always been stale and baseless; this economic downturn, however, may provide the motivation needed to overturn a failed referendum.