The political focus now shifts from the Republican defeat on Tuesday to the even more critical and historic election of 2008. And the Republicans can turn things around quick if they focus on bringing about meaningful and substantive reforms — just as their forbears did during the Reagan revolution.
The height of the Reagan economic recovery occurred in 1986. And what a recovery it was. Prior to Reaganomics, the American economy was collapsing: Inflation rose 25 percent between 1979 and 1980. The prime rate hit 21 percent. Unemployment was headed toward double digits. Family income had started declining. Poverty had been increasing for years. And by 1981, every major economic indicator was headed in the wrong direction.
In the 1982–1983 period, however, every major indicator quite literally turned around. Inflation started a long decline, as did unemployment and interest rates. Family income started rising. Poverty started declining. Over the next eight years, the economy created over 20 million new jobs, with soaring growth adding the equivalent of the entire economy of West Germany to U.S. GDP.
The foreign-policy turnaround was even more dramatic. In the 1979–1980 period, the Soviet empire was on the march, and seemingly unstoppable. Soviet troops marched into Afghanistan in 1979, and the communist advance spread into Africa, South America, and even Central America, looking north. The Soviets also were deploying new nuclear missiles aimed at Europe.
But by 1986, Reagan’s policy of quietly starving the Soviets of their chief sources of financing was well on its way, with the resulting collapse of the Soviet empire to occur just four years later. U.S.-funded counterrevolutionaries in Afghanistan and Nicaragua had stopped the Soviets cold. New Pershing II missiles were deployed in Europe to counter the Soviet threat. Reagan had started developing SDI — the Strategic Defense Initiative — which the cold-eyed Soviets knew they couldn’t match. As Margaret Thatcher famously said, “Reagan won the Cold War without firing a shot.”
Yet, in the 1986 elections, Reagan’s second midterm, the Republicans lost 8 Senate seats and Senate control shifted to the Democrats 53–45. The Democrat House majority climbed to 258-177, on its way to a 100-vote margin achieved in the 1992 elections.
By 1994, however, the Newt Gingrich-led revolution had produced a Republican takeover of both houses of Congress. How did this happen?
The Republican turnaround was achieved through a focus on substance and meaningful new ideas. After 1994, the Republican Congress not only cut taxes, but spending as well. The tax cuts focused on capital investment, and produced the economic boom of the 1990s. The revenues from that boom, along with restrained spending, turned years of historic deficits into historic surpluses.
That Republican Congress also adopted fundamental reforms of the nation’s leading welfare program, Aid to Families with Dependent Children (AFDC), which was first adopted under FDR and the New Deal. Farm subsidy programs also were dramatically reformed, with spending sharply reduced.
All of which brings us to the current political moment.
To begin, the nation needs pro-growth tax reform, and Gingrich, as he did in the 1990s, may again have the answer. In his book, Winning the Future, Gingrich proposes an optional flat-tax plan that actually involves a tax cut on a static basis, before taking economic growth into account. Taxpayers would be free to choose the new tax system, or continue to file under the old one if they prefer.
But an even bigger domestic problem is the pending explosion of entitlement spending. The latest long-term projections of the Congressional Budget Office show these exploding entitlements doubling federal spending as a percent of GDP over the next forty years — after fifty years of federal spending being held near 20 percent of GDP.
Every domestic spending and budget issue needs to be evaluated within the context of this big-government explosion. Exultant liberal Democrats are already talking about expanding health care entitlements and initiating a new “war on poverty.” But Republicans and conservatives are not going to succeed by taking an ax to what are today popular entitlements. What is needed is fundamental reform — restructuring that will bring about lower-cost entitlements that ultimately provide even better service.
Indeed, this is the only way the entitlement problem can be addressed without giving in to dramatic tax increases by way of compromise. Unfortunately, even some conservatives have given in to the idea of tax increases in return for some entitlement cuts. With federal spending now projected to grow from 20 percent of GDP to 40 percent, it would take a whopping, historic tax increase to balance the long-term books, even with the maximum of feasible entitlement cuts.
The necessary fundamental reforms include personal accounts for Social Security, which are so powerful since they don’t just restrain the growth of entitlement spending, but also shift large chunks of it out of the public sector and into private hands. At the same time, these accounts would provide workers with a better deal; simply, they would stand to retire with more cash than they would with the current program.
Republicans also need to expand the successful block-grant reforms of the old AFDC to the other major welfare programs, such as Medicaid and food stamps. This again would better serve the poor by helping them leave welfare, while sharply restraining long-term federal spending.
If done right, personal accounts and welfare reform are political winners, too.
For the 2008 presidential campaign, the GOP will need to put forth a Reagan-like advocate of fundamental conservative principles and reform. Failing that, we can expect a 1960s-style tsunami of big-government socialism to sweep into the White House.
What a decisive, historic election this will be.
– Peter Ferrara is a senior fellow at the Free Enterprise Fund and is director of entitlement and budget policy for the Institute for Policy Innovation. He also serves as general counsel and legal director for the American Civil Rights Union.