NCPA - National Center for Policy Analysis


January 27, 2010

In the nine quarter-century periods since the American republic was founded in 1789, the one with highest economic growth and job creation was the period from 1983 through 2007.  Particularly remarkable -- there were just four quarters (out of 100) of negative economic growth in that entire interval, says Richard W. Rahn, a Senior Fellow at the Cato Institute and Chairman of the Institute for Global Economic Growth.  

  • That period of time was characterized by a reduction in government spending from 23.5 percent of gross domestic product (GDP) to 20 percent (the low point was 18.4 percent in 2000), and a reduction in marginal tax rates.
  • Despite the reduction in tax rates, tax revenues both in absolute terms and as a percentage of GDP grew in the 1983-2007 period because of the improved work and investment incentives.
  • As a result, the deficit fell from 6 percent of GDP in 1983 to just 1.2 percent in 2007. 

For many years (until 1983), the Federal Reserve implicitly followed the Taylor Rule (a formula that provides central bankers with information about whether they are creating too much or too little money) to guide monetary policy, which gave the United States both a falling and relatively stable rate of inflation, says Rahn.  

During that golden quarter-century, both the presidency and Congress switched parties a couple of times.  Thus, it should be politically possible to go back to the policies that gave us the golden quarter.  Most people understand that if the government is growing faster than the economy (as it has been for the past two years) disaster ultimately will occur, but if the economy and the private sector grow faster than the government, as they did from 1983-2007, almost everyone can be far better off, says Rahn. 

As noted, the golden quarter was characterized by a long-term trend toward lower tax rates.  The current Congress and administration have been enacting tax increases and proposing many more, which will only cause more economic misery.  Many tax rates, particularly on capital, such as the capital gains tax and corporate income tax, are well above their revenue and welfare-maximizing rates and should be reduced, not increased, says Rahn. 

Source: Richard W. Rahn, " Recouping the golden quarter," Washington Times, January 27, 2010. 

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