America’s Recession-Busting Record: A Non-Partisan History

Perhaps the most studied aspect of economics is the “boom and bust” cycle of a free-market economy.  The Left will claim that the unhealthy oscillation of the economy is due to an unpredictable market place where under-regulated speculators of various types (real estate, stocks, currency, etc) create a bubble of false wealth that eventually pops.  The ensuing recession that occurs post-pop leads to unemployment and wide-spread misery disproportionately shouldered by the middle and lower classes.  The Left claims that the only way to avoid such catastrophes is to regulate the irresponsible risk-takers and revive the economy with spending and stabilizing regulations.

The Right has a different take what causes the boom-bust cycle.  As per the free-market crowd, economic booms and busts tend to be the result of government meddling in an otherwise rational system.  Government regulation, federal reserve currency policies, and other market distortions create the bubbles and then retard the recoveries.  From the Right’s perspective, recoveries can only happen when the market-distorting government interventions are removed and marginal tax rates are lowered.

So, who is correct? Both sides can line up impressive lists of Nobel Laureates to make their case.  To say that the debates can get complicated and tedious to follow is an understatement. Rather than get mired in esoteric theory, let’s take a look at how each side fared in the history books.  Below I have listed the three most interventionist presidents and the three most free-market presidents of the last 100 years.  The measure interventionist vs free-market was determined by a mix of marginal tax adjustments and regulations enacted under their presidencies.  The results would be surprising to any Republican or Democrat.

The Interventionists:

1. Herbert Hoover (Republican)

The single greatest act of revisionist history in the world of economics was to call President Hoover a symbol of laissez-faire capitalism. Hoover signed the notorious Smoot-Hawley tariff of 1930, which raised US tariffs on over 20,000 imported goods.  The act and retaliation to it by other countries was said to have reduced US imports and exports by over half.  Many argue that it is one of the primary causes of the great depression after the federal reserves wild expansion of money supply and credit (sound familiar?).  To make up for the lost market, Hoover signed in massive subsidies to farms and business, increasing government’s share of GDP by over a third. Late in his first (and only) term, President Hoover enacted another interventionist policy: The Revenue Act of 1932.  The act enacted the largest peacetime tax hike in US history. The income tax was raised from 24% to 63% in the upper bracket. The interventions of Hoover were so egregious, that then candidate Franklin Roosevelt criticized him for overspending, interfering with trade, and putting millions on the government dole.  FDR’s running mate, John Garner said Hoover was, “leading the country down the road to socialism”.  The supposed symbol of free market capitalism lost the election because he was pegged as a socialist by FDR.

2. Franklin D. Roosevelt (Democrat)

After running against Hoover’s failed interventionist policies, FDR would go on to use the crisis to enact many more interventions into the US economy.  FDR had even given election promises including a balanced budget, return to the gold standard, and a 25% reduction in spending.  In his first three years, government expenditures rose by over 80%. Over his tenure the income tax would climb from 63% to over 94% in the upper bracket.  The corporate tax rate was raised from 13.5% to 40%, and the capital gains tax rose from 12.5% to 39% in 1937 and then was lowered to 25% by 1942.  Quite possibly the most interventionist policy of his presidency was the National Industrial Recovery Act (NIRA) of 1933.  The NIRA put most manufacturing industries under government control and regulated what prices goods and where they could be sold.  It was fascism in its purest form (see definition of economic fascism here), and lasted until the Supreme Court struck it down as such in 1935 (the only reason FDR is in second place).  FDR also enacted the National Labor Relations Board (NLRB) in 1935 with the Wagner act which took labor disputes out of the courts and put them under the federal government.  Union membership skyrocketed on the heels of the act.  There were many more acts and spending programs enacted throughout FDR’s four terms.

3. Barack Obama (Democrat)

President Obama has enacted sweeping regulations of the economy during and in the wake of the Great Recession.  A combination of massive regulations and planned tax hikes put him in third place behind FDR & Hoover for most interventionist president of the last 100 years.  In the wake of the credit-induced recession of 2008/9, president Obama promised to hike income taxes from 35% to 39.6% (+.9% medicare tax).  The capital gains tax rate would be raised from 15% to 20% (+3.8% medicare tax) and the dividend tax will rise from 15% to 43.4%.  Medical device companies will see a 2.3% tax on revenues, which translates to about a 15% tax increase on profits (35% corporate rate raising to approximately 50%).  From a regulatory perspective, President Obama enacted the Dodd-Frank bill, which controls how credit is issued in the United States and gives new capital requirements.  The act has effectively halted small business loans and slowed the non-subprime mortgage market as banks try to interpret the new mountain of red tape (see Economist article here).  President Obama passed a massive intervention of 1/6th of the US economy with the Affordable Care Act of 2010 (AKA Obamacare).  The bill will effectively control the health insurance industry and what services/technologies will be compensated by Medicare/Medicaid.  In addition to sweeping regulations and tax hikes, Obama maintained the extremely high (and market distorting) spending pace of President George W. Bush’s last year throughout his presidency.

The Free-Market Presidents:

1. Ronald Reagan (Republican)

President Reagan presided over the largest tax cuts in US history and substantial de-regulation of the economy.  Over his tenure, the top income tax rate decreased from 70% to 28%, the corporate tax rate decreased from 46% to 34%, and the capital gains rate fell from 28% to 20% (and then came back up to 28% by 1987).  Reagan issued an executive order in 1981 that required that regulatory agencies had to prove that the potential benefits of their regulations would outweigh the potential costs before the regulation could be enacted.  He would also go on to symbolically break the union stranglehold on American business by busting the air-traffic controller strike.

2. John F. Kennedy (Democrat)

President Kennedy, the father of trickle-down economics, gave a speech in 1963 to the Economic Club of New York extolling the virtues of a marginal tax cut.  He claimed that his income tax cut from 91% to 70% (top bracket) would lead to economic growth and increase tax revenues in the long run.  He also cut the corporate tax rate from 52% to 48%.  Though he didn’t live to sign the bill, President Kennedy gets the credit.

3. William J. Clinton (Democrat)

Clinton may have raised the individual income tax rate from 31% to 39.6%, but he was also responsible for the one of the largest capital gains tax decreases, from 28% to 21%, in US history. Other contributions that earned him third on the list were not tax related retreats from government intervention.  Under his presidency a landmark free trade agreement was signed (NAFTA), and a balanced budget amendment that would dramatically rein in government spending was enacted.  The federal government under Clinton contracted enough to create budget surpluses by the time he left office.

The Results:

The interventionist presidencies are all characterized by abnormally long and deep periods of recession. President Hoover inherited a credit bubble collapse and chose to pile onto a weak economy with a trade-crushing tariff and almost tripled the tax rate.  When FDR swept him out of office with promises of fiscal restraint, he went on to build on Hoover’s failed policies of higher taxations, spending, and created a partial fascist state level of industrial control.  The economy was severely damaged with this one-two punch and the longest and deepest depression in our history resulted.  President Obama has chosen to repeat the mistakes of the depression with his tax and regulatory legislation.  The credit bubble recession created by the federal reserve and government housing policies was never allowed to correct itself with the Dodd-Frank bill and extreme Federal Reserve and Treasury department policies he enacted.  In addition to the credit freeze in the country, health care regulation and massive tax increases have frozen business decision-making and held trillions of dollars of private capital on company books and overseas.

The three free-market presidents had a great deal of success with their policies.  President Reagan inherited an extreme inflationary recession and turned it around to one of the strongest growth periods in our nation’s history. JFK’s tax cuts also led to strong growth rates and very low unemployment.  President Clinton’s policies led to a balanced budget and a roaring economy in the late 1990′s.

The history of free-market vs interventionist presidencies is surprisingly non-partisan.  Both lists are split between Republicans and Democrats.  The one commonality is that free-market policies have yielded consistently higher growth rates no matter what economy was adopted by the president.  Interventionist policies have consistently retarded growth and led to protracted recessions.