American prosperity

What a gift to civilization this United States of America is. If you had to count the ways, how many very big things there are in which this country has positively excelled over its over two centuries of history.

There is of course the political order watched over by our Constitution. Popular government remaining limited and respectful of rights would be a pipe dream the world over without the example of this country.

There is also the incredible tradition of social peace in a country of tens and now hundreds of millions of persons. Americans are now marking the 150th anniversary of the civil war that rent this country so badly in the 1860s. Since that time, this country has seen essentially no political violence of note, and in particular in an era—the 20th century—in which political violence and revolutionism took tens of millions of lives worldwide.

Then there is the moral maturity this country has shown over the years, evidenced in particular by its unsurpassed tradition of philanthropy. Do you remember a few years ago, when the tsunami hit in Indonesia, and word went out over the media that the relief effort which succored several million in the aftermath of that disaster represented the largest act of relief in world history? This was actually wrong. That honor still belongs to the American-led response to the Communist-induced Russian famine of 1921, when 20 million were saved from starvation. American giving, so much of it private, has been so profuse, effective, and unselfish that we are apt to forget its major examples.

All of these stunning traits, our political order, social conviviality, and moral goodness, make up, collectively, what we are wont to call “American exceptionalism”—that glorious tendency in our country, shown so many times over its history, to be true to being a good and just society.

But for all these things, there is still one other that might be the most incredible and persistent trait of American exceptionalism of them all. This is our mind-boggling tradition of economic growth and prosperity.

Do you know how much the economy of the United States grew in the one and a quarter century since the Constitution was ratified, in 1789, until the fateful year of 1913, when this country established the Federal Reserve and the income tax? 1789-1913? The number is 150-fold. The economy was 150 times larger in 1913 than it was in 1789.

In the century since 1913, since that Fed and that income tax got set up, we have grown but 22 times. But the point is still there: the American economy grows at magnificent rates, sometimes at rates that will take your breath away.

Over all these amazing years of economic growth, the United States has been the staging ground for thousands and thousands of successful entrepreneurs and businesspeople. Even more remarkable, there have been tens of millions, truly hundreds of millions of individuals who have peopled this nation’s middle class, a mass of humanity who have led lives of comparable affluence unmatched in the history of the world. What other nation has done such a thing over the years, now over the centuries—made possible not only the great rich, but a mass middle class?

Needless to say, the only way to do this is by leading the world as its largest and greatest economy. And the United States has been that for quite some time—since about 1880, or 140 years ago. We should stop to think about what this amazing tradition of prosperity means, not only to ourselves, but to the great world as well.

Here is what Ronald Reagan said in his farewell address from the Oval Office in January, 1989:

“I’ve spoken of the shining city [on a hill] all my political life, but I don’t know if I ever quite communicated what I saw when I said it. But in my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That’s how I saw it, and see it still.”

It’s all there, in Reagan’s words, the strength, the political order, the social peace and conviviality, and make no mistake, the commerce and entrepreneurialism that comes from a booming nation freely pursuing its economic prospects. Great economic growth is part of the foundation of the American character.

There is a reason we have to rehearse all of this. This reason is, I fear, all too obvious to us today, late in the year 2012.

This reason is the terrible Great Recession that we have endured of late. The Great Recession of 2008-2009 was very bad, and the recovery since that time has been so poor that it has not even been deserving of the name. This has meant that not only has the United States, over the last five years, been untrue to the mainstream of its great tradition of unrivaled prosperity for the millions of citizens and inhabitants of this country; for this Great Recession and feeble recovery has moreover gone further and implanted in so many minds across this land the false and dangerous notion that the great tradition of American prosperity is something close to over—that this sine qua non of the American experience to date, that of mass prosperity and opportunity, must now be regarded as something that no longer can be aimed at, much less attained.

We should be aware that there were other periods in American history, some of them rather extended such as our own today, when it seemed that this nation had struck out on an inferior path, toward perhaps permanently lower growth, living standards, and opportunity. In the 19th century, for example, there were several cases when unemployment swelled up, the value of the dollar became questionable, and growth plunged and then slowed to a crawl for a number of years on end.

But every one of those crisis was shaken. And in every case, remarkably similar solutions were applied—and they worked every time. It is time to heed their lessons.

Here is what the United States did in the 19th century to get out of crisis. The country would reaffirm the soundness of its currency and stop the march of government spending. Take, for example, the state of the nation just after the civil war, in 1865. At that point in time, the value of the dollar had recently dropped by half and was off the gold standard, meanwhile as federal spending had ballooned to over 30 of GDP in just four years’ time. Firmly, the United States committed to correcting both problems: to getting the dollar back on gold, and to hacking down the size of government to its historical norm—2% of overall economic output. (Do we realize that the federal government’s standard size from 1789 to 1913 was 2% of GDP, less than one-tenth of the level today?)

By 1879, both problems were fixed, a dollar on gold and government back at 2% of GDP. Here is what resulted: the 1880s, the single greatest decade of economic expansion in American history, when the economy doubled in size in the dozen years after 1879. That’s right: a 6% per annum rate of growth kicked in, back then, once the United States truly committed to small government and a gold-backed dollar. 6% per year.

A dollar as good as gold and government at 2% of GDP: this was the recipe that gave us the year-in-year out growth that summed up to that 150-fold increase in the American economic pie from 1789 to 1913. No wonder France gave us the Statue of Liberty to welcome all those seeking to take part.

These days, today, we are upset because growth is south of 2% per year—as well we should be. And we’ve been stuck in recession and slow growth for pushing five years now. Well, how about this statistic. For eight years, from 1913 to 1921, the yearly rate of growth in the American economy was 1.4%–inclusive of two recessions. Think we haven’t seen the kind of feeble, enervating performance in the American economy if we don’t count our own days, along with the Great Depression? Think again—it has happened, in extended recessions we have forgotten—in this case that of the eight years after the establishment of the Federal Reserve and the income tax in 1913.

All that was dispatched with when in 1921 the new president, Warren Harding, gave his Treasury Secretary Andrew Mellon carte blanche to stabilize the currency, which he did. The dollar, which had been going on wild, 100% swings during that eight years of recession (and Fed activism) stabilized at no change against the price level, while taxes were cut by two-thirds. As for government spending, it fell from a quarter of real output all the way down to three percent. What happened? The most celebrated era of American prosperity of them all: the Roaring 1920s.

The old rule established in the nineteenth century was to get out of recession by bringing down government spending to very low levels and making the dollar stable once again. To this, in the twentieth century was added tax cuts. Every one of these moves—non-manipulation of the dollar, low federal expenditures, and an unobtrusive tax code, represented the collective wisdom of American political economy, a collective wisdom that accompanied what by the 1920s was now the largest economy in the world by a factor of three. And the distilled content of that wisdom was this: government, let the private sector run as much as possible.

It is a little-known secret that the reason there was a semi-recovery in the Great Depression of the 1930s, under Franklin Roosevelt, was that the United States recommitted to the international gold standard in 1934. And it is also a little-known secret that the reason a real recovery began after World War II was that this commitment to the gold standard was at last supplemented by two further things: tax cuts (in 1944 and 1947) and a free-fall in government spending. From 1944 to 1947, there was a 75% reduction in federal expenditures. By 1947, we were only allocating 11% of our output to the federal government; that number had been 44% three years earlier, at the peak of World War II.

Do you know how great the postwar boom was in the United States? The real economy—that is, the economy minus the federal government sector, expanded at no less than 4.3% per year for the twenty-nine years from 1944 to 1973. Without question, the heady fall in government spending started this great run, but also playing their part were the dollar guaranteed in gold, and the drumroll of tax cuts begun in the mid-1940s and reaching their culmination in the remarkable across-the-board 30% reduction in income tax rates that President John F. Kennedy proposed and Lyndon Johnson made law in 1964.

There is the roster again: government spending diving from heights; a dollar stable against clear measures of value like gold; and a commitment to tax cuts. What did we get? We got postwar prosperity, the single most cherished era of American prosperity of them all. We must not forget how we got it and sustained it for so long.

Now in the 1970s and early 1980s, we dealt with conditions very much as bad as those we have gone through today—only for a longer time. Today we are lamenting our 1.8% per year growth. Did you know that for the nine years 1973-1982, we had 1.8% growth, inclusive of three recessions? The first of them, we saw five quarters of GDP decline. Stocks lost two-thirds of their value. This was the long “stagflation” episode, which was brought about by tax increases, Federal Reserve expansionism, and the march of spending. Did I mention that consumer prices went up by 200% in the stagflation years?

It’s a wonder we are so bold as to call ours the worst recession since the Great Depression, given that stagflation, with all the characteristics and worse of our own contemporary experience was right there in the 1970s and 1980s.

Well, we did something to lick it, to end it outright and for good. Arthur Laffer, the great economist, liked to call the components of the solution applied the Four Principles of Reaganomics. We cut taxes—down 25% by 1983. We stabilized the dollar—gold held at $350 an ounce and inflation collapsed from 14 to 3% for the 20 years after 1982. We cut spending—from the 1983 peak through the late 1990s, spending at the federal level went down by fully a quarter as a percentage of GDP; and we hacked down regulations.

The four principles of Reaganomics—and you can throw in free trade for a fifth, and what did we get? Two magnificent decades, the 1980s and the 1990s, both with runs of 4.5% growth per year that gave the Roaring 1920s and the historic years of postwar prosperity a run for their money.

You might have noticed something in this rehearsal of the great episodes of American economic history, of American economic prosperity. They basically add up to the entire time that the American economy has bothered to grow at all. If you look at, say, the 1910s, when we first got frisky with the Fed and the income tax, we got clocked with nil growth. If you look at the 1930s, when we at last stabilized the dollar, but let regulations and taxes march, our reward was nil growth in toto. If you look at the stagflation decade of the long 1970s, when we got complacent about a sound dollar, the march of the state, and taxes caught in bracket creep, we recorded a growth rate that if held would have made us one-third poorer today than we are. Throw in the occasional busts of the 19th century, and you have a complete set.

All economic growth of note that this country has ever seen has resulted of course from the remarkable ingenuity and determination of its entrepreneurs, investors, workers, and doers. But most of all, now, in our concerning and disconcerting political environment, it is high time for us to realize that the commitment to reduce the scope of the state is what has delivered that so very essential element of the American character—our prosperity.

And all this does not remain terribly abstract at all. We might even call the most modern version the five principles not of “Reaganomics” but of a free political economy: a stable means of exchange (the dollar); limited government spending; low taxes; a commitment to deregulation; and to free trade with the world.

In earlier epochs, only one or two of these reductions in the state imprint on our economy had to be adopted, because the state had not grown so large as to necessitate more. But these days, with the state camping on the real sector as never before outside of wartime, the list has grown of the things that the state must undertake to cut down, in its displacement of the real economy. The thing that hangs in the balance is no less than economic growth. Walk back the state and we’ll get growth, and handsomely; get complacent about the state, and we will suffer as we do today—and for longer.

Perhaps the current political environment does not make us optimistic about the chances of enacting the leviathan-limiting reforms that must come if we are to see the kind of wonderful economic growth that this country has always made its trademark. Perhaps. But a sure place to start is getting things clear in our heads, especially when there is an powerful opposition out there saying different and confusing things.

Let it then be said clear and true. The natural course of the American economy is for so much growth that millions upon millions of people become happy and affluent. And that natural course of the American economy—my, does history show it—is attained when the state is content comprehensively to step aside.

Books by Brian Domitrovic may be found in The Imaginative Conservative Bookstore. This address was given to the 36th Annual Founders’ Day breakfast of the Free Enterprise Institute on November 8, 2012.

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