Democrats' recipe for a weak recovery

Jeb Hensarling and Paul Ryan:

One of the strongest factors promoting recovery from our 10 post-World War II recessions was an unshakable conviction that, regardless of the immediate trouble, the American economy is fundamentally strong. Based on this underlying confidence, recessions and recoveries roughly conformed to the principle of the bigger the bust, the bigger the boom, and vice versa.

Thus real growth in the four quarters following postwar recessions averaged 6.6% and 4.3% over the following five years. As the chief economist for Barclays, Dean Maki, said in this newspaper on Aug. 19, "You can't find a single deep recession that has been followed by a moderate recovery."

That may no longer hold. Since the current recession has lasted a record seven quarters—and has been marked by a near-record average GDP decline of 1.8% per quarter—we should be witnessing the start of a powerful and sustained recovery. Yet forecasts of a 2% recovery in growth are only one-fourth as strong as postwar experience suggests. Meanwhile, unemployment sits at a generational high of 10.2%.

Why all the pessimism? The source appears to be a growing fear that the federal government is retreating from the free-market economic principles of the last half-century, and in particular the strong growth policies that began under Ronald Reagan. A review of the economic policies instituted by President Barack Obama and the Democratic-controlled Congress lends credibility to this concern.

Exhibit A is the economic stimulus package signed into law by President Barack Obama in February. Even among previous stimulus efforts, the 2009 stimulus stands out for its ineffective targeting and sheer size. With interest, it is $1.1 trillion, double the size of Roosevelt's New Deal spending as a percentage of GDP.

Virtually none of the stimulus spending was directed towards encouraging broad-based private investment, and thus failed to encourage true economic growth. An analysis by economists John F. Cogan, John B. Taylor and Volker Wieland, published on this page on Sept. 17, suggests that while the stimulus succeeded in temporarily and marginally increasing disposable personal income, it left personal consumption spending virtually unchanged.

Meanwhile, $112 billion of its $300 billion tax relief was in the form of payments to people who paid no income taxes. These payments, akin to a one-time welfare check, do not change the incentives to save and invest, and do not effectively promote broad-based economic growth.

Exhibit B is tax policy going forward. It is a near certainty that Democratic-controlled Congress will allow most of the tax cuts of 2001-2003 to expire on Dec. 31, 2010. Marginal income tax rates, capital gains rates, dividend rates and death-tax rates will increase—significantly. Hardest hit by these increases will be small businesses that file under the individual income tax code as sub-chapter S corporations, partnerships and proprietorships. Yet these are the very people whose investment and hiring decisions either drive or starve recoveries.

Exhibit C is the administration's intervention in the GM and Chrysler reorganizations. Upsetting decades of accepted bankruptcy law, the administration leveraged TARP funds to place unsecured and lower priority creditors like the United Auto Workers union in front of secured and higher priority creditors. This intervention has arguably had the effect of stifling investment as wary investors watched political considerations trump the rule of law.

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There is more including cap and trade and health care reform. Both will do great harm to the economy.

We lnow and the American people know that tax cuts and spending cuts are the way to boost the economy, but Democrats have an aversion to them because they are control freaks who fear letting the American people make the choices in the type of economic growth we achieve. They want to have theri thumb on the scales to try to control how the economy grows and to give benefits to their constituency groups.