Learning From The Past

Each New Year offers the opportunity to forget past mistakes and hope for a brighter future. Part of planning for success requires an understanding of history. From a 2008 discussion of whether the United States was entering a recession, I learned some lessons that offer hope for 2014 and beyond.

The quarter-century leading up to 2008 was the greatest period of prosperity in human history. In most areas of the world, longevity and quality of life improved, standards of living rose dramatically, more people emerged from poverty, and more wealth was created than ever before. In the United States, average economic growth was positive for almost the entire 25 years, and the rate of growth accelerated for most of the period. In “real 2000 dollars,” total economic output more than doubled from $5.1 trillion to $11.3 trillion, and per capita economic output increased from $22,400 to $37,807. Total manufacturing output peaked during 2007, and unemployment fell from about 7 percent in the 1970s to just below 5 percent, where it held steady from 2003 through 2007.

Such an economic expansion is naturally accompanied by gains in wealth. The Dow Jones Industrial Average was 825 at the start of the 1980s, and increased by 1,400 percent until it hovered above 12,000 in 2007. With the availability of savings products such as IRAs and 401(k)s, mutual funds and other similar investment vehicles, there was a “democratization” of capital markets, and more than 50 percent of American households owned stocks by 2005 (up from 19 percent in 1983). Net worth for the average family increased by $24,000 (from $69,000 to $93,000) from 1989 to 2004.

For those living below the official “poverty line” in the early 1970s, fewer than 40 percent owned a car, and almost none had air conditioning or color televisions. By 2004, nearly half owned their own homes, three-quarters owned at least one car, 97 percent had color televisions, and two-thirds had air conditioning. The poor in the United States occupied nearly two-thirds more living space than the poor in Sweden, and almost seven times the square footage of the poor in Mexico. Infant mortality had dropped, and life expectancy had increased. Across the world, there were more than twice as many countries with “fast-growing” economies in the 25 years since 1980, and approximately 135 million people emerged from poverty between 1999 and 2004.

What factors drove this period of prosperity? In our country, a huge expansion in economic freedom began and later spread throughout the rest of the world. Several major deregulations, the expansion of free trade, and significant reductions in marginal tax rates all contributed to this expansion.

Both major political parties had a part in the expansion. President Jimmy Carter, a Democrat, signed the Airline Deregulation Act of 1978, lifting price and route controls and allowing airlines to offer unsold seats at discounted prices while choosing more efficient routes. Travelers saved an estimated $5–$10 billion per year as a result. Carter also signed into law the Motor Carrier Act in 1980, allowing truckers more control over what routes they chose and products they could transport. Within two years, truckload-shipping prices had dropped by 25 percent and “just-in-time” inventory systems were made possible through gains in efficiency.

Republican President Ronald Reagan continued deregulation with reduction or elimination of price controls in utilities (such as oil and gas, telephone, and cable television). Also during that time, the scope of antitrust laws was reduced and banks were allowed more choices in asset investment. NAFTA (1993) and CAFTA (2004) eliminated or phased-out most tariffs on products traded between the United States and Canada, Mexico and Central America.

While political debates increasingly focus on expanded regulation and higher tax rates for the wealthy and increasing the debt limits, it is interesting to look back at the quarter-century when economic prosperity was the highest in history. Reagan signed the Economic Recovery Tax Act of 1981, reducing top marginal tax rates from 70 to 50 percent and eventually 28 percent as he left office. Corporate tax rates under Reagan dropped from 34 to 28 percent.

The widely criticized Bush tax cuts of 2003 lowered marginal tax rates as well as taxes on dividends and capital gains, phased out the “death tax,” and actually shifted the tax burden toward higher income earners while removing millions of low-income citizens from the tax rolls completely. For the following five years, the federal deficit shrank. In 2005, the top 1 percent paid almost 40 percent of all income taxes, and the bottom half of earners paid a mere 3 percent.

After several years of recession, increasingly burdensome regulation, and a clogged legislative process, many citizens and leaders alike have forgotten the lessons of economic history. Looking back and understanding the factors that built a quarter-century of prosperity might help our leaders repeat that success.

About the Author

Denise Norberg-Johnson

Financial Columnist
Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net .

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