In economics, it is important to understand both economic theories and practices, but also to understand the history of certain economic systems. For example, after Adam Smith published his book, “The Wealth of Nations,” in which he explained the need for free trade as it provided more goods and better quality goods, people began to see that the then-current practice known as Mercantilism, the policy of minimizing imports while maximizing exports, had done nothing but provide their peoples with poorly made goods and a very small selection of it. Why is it hard for people on both sides of the political aisle to accept the historical and economic fact that less government is good for an economy rather than the other way around? Economists from Friedrich Von Hakey, Milton Friedman, and Thomas Sowell have produced countless books and papers to argue these points. Philosophers from John Locke to Ayn Rand have written many novels and essays on the philosophical and moral cases for a market economy devoid of large governments. Whether this issue is because of complacency within the political class to uphold the status quo, or because of the lack of good representation on the side of Laissez-Faire economics is for an entirely different essay. Instead, we need to focus on some of the greatest examples of how less government intervention and the implementation of free-market policies, them being tax cuts, deregulation, and privatization, have been beneficial for both the economy and its consumers.
One important issue is that of taxation and the power of letting people keep more of the money they earn, particularly when it comes to businesses but also the average citizen. The argument over tax cuts has long been an issue for the political right and left to argue over due to many factors. The following information will show that tax cuts do indeed lead to economic growth and through that will lead to more benefits for both the economy and its consumers (and at times help increase government revenue).
President Kennedy showed the power of cutting taxes and getting the government out of the pockets of both the working class and the upper class. Marilyn Geewax published a piece for NPR back in 2013 in which she commented on the effect tax cuts had on the US budget deficit along with its lasting economic legacy. Geewax wrote,
“Many lawmakers worried that reducing taxes without cutting spending would create unacceptable budget deficits. But Kennedy, who famously noted that "a rising tide lifts all boats," insisted tax cuts would generate broad-based growth.
Congress finally approved the tax cuts in early 1964, three months after Kennedy's assassination. The following fiscal year, the federal budget deficit did indeed shrink. Stock investors loved it. Between 1962 and 1966, the Dow Jones industrial average nearly doubled.” -Marilyn Geewax (NPR and Geewax)
We can even look back to the 1920s under presidents Warren G. Harding and Calvin Coolidge to see the effect lowering taxes had on federal revenue. The Heritage Foundation found that during this time taxes were cut from 70% down to almost 25%, the effect this had is that revenues rose from $719 million to nearly $1,164 million which was an increase of 61%. Then treasury secretary Andrew Mellon said,
“The history of taxation shows that inherently excessive taxes are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden, and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people.” -Andrew Mellon
After the Mellon tax cuts, America would see a massive rise in economic growth. From 1922-1929 real gross national product grew at an annual average rate of 4.7% and the unemployment rate fell from 6.7% to 3.2%. (Heritage and Mitchell)
Just last week the IRS had put out a study showing the impactful effects of the tax cuts that were implemented under the Trump Administration. During that time Republicans were being claimed to only pass the cuts in favor of the richest members of our society, Bernie Sanders even went so far as to say that some of his richest friends, ``just got richer,” but it seems that Sanders' claim didn't age well according to the IRS’s study. The Heartland Institute, a free-market-oriented nonprofit research group, produced a study on the IRS’s claims which showed that filers with an adjusted gross income (AGI) of $15,000 to $50,000 enjoyed an average tax cut of 16% to 26%in 2018, the first year Republicans’ Tax Cuts and Jobs Act went into effect and the most recent year for which data is available. Filers who earned $50,000 to $100,000 received a tax break of about 15% to 17% and those earning $100,000 to $500,000 in adjusted gross income saw their income taxes cut by around 11% to 13%. The most shocking discovery of it all was that top earners had paid a higher percentage of their earnings in tax than the previous bill passed during the Obama administration. Heartland found that those who earned $200,000 or more saw an INCREASE in their tax burden. Justin Haskins, the author of the study, wrote…
“The available evidence is clear: Based on tax data from 2017 and 2018, the Tax Cuts and Jobs Act reduced taxes for the vast majority of filers, led to substantial improvements in upward economic mobility, and disproportionately benefited working and middle-class households, many of which experienced tax cuts topping 18 percent to 20 percent.” -Justin Haskins (Heartland and Haskins)
And according to the Tax Policy Center, economic growth went from 2.3% in 2017 to 2.9% in 2018. (Tax Policy)
In the argument that lowering taxes leads to economic growth the three examples of Kennedy, Harding/Coolidge, and Trump the evidence is clearly in favor of lower taxes.
Another method that has proven to be extremely beneficial is Deregulation. Deregulation is when governments cut down costly and ineffective rules that can build up monopolies or prevent effective competition. It has been used by different presidents to open up the markets to competition and also allow businesses to compete in once expensive endeavors.
Again, we could use liberals to show the effectiveness of laissez-faire economics, a great example being President Jimmy Carter. During the economic downturn in the late 1970’s notable democrats like Senator Ted Kennedy, and as mentioned Jimmy Carter, started to understand that over regulation protected large corporations from competition, therefore making them complacent and allowing for poorly made goods and badly managed business practices. Ted Kennedy would hold several senate hearings in which people like Ralph Nader and Alfred Khan gave testimonies and evidence on how deregulation would improve industries such as Trucking, Airlines, and even Brewing. Matt Welch, a writer, and editor for Reason Magazine wrote in an article about this subject…
“The resulting Airline Deregulation Act of 1978, signed by Carter, killed the Civil Aeronautics Board—a federal agency that decided which airlines could fly where, and even what they could charge. The new competition to the old airline cartel reduced fares, expanded destinations, increased safety, and made air travel an option for those of us who aren't rich.” -Matt Welch
Carter moved to deregulate huge swaths of the trucking economy with the Motor Carrier Act of 1980 which limited the power of the ICC (Interstate Commerce Commission) and he sought to ease the cost of average goods for American citizens. His deregulation was aimed at cutting down the licenses needed to drive trucks as well as trucking requirements in the areas of weight or style of truck. Statistics shown by The General Accounting Office found trucking rates had fallen as much as 10-20% with some shipping companies reporting an almost 40% decrease in costs, and a survey showed that more than half of shippers indicated that service quality had improved. They also found that (EconLib)
“Nearly 77% of shippers favored deregulation of trucking.”
Carter’s deregulation of breweries allowed the US to go from only having a total of 50 brewing companies to over 5,000. This came about by chopping down prohibition-era rules on beer making which prohibited “make it yourself” style brewing.
The deregulation of the past has provided great gains for today’s economy with thousands of new jobs via new businesses created through opening up the market, lower costs that help poorer families own items like iPhones or laptops and a more open market than one that is dominated by monopolies.
The last item for examination is the policy of privatization. Privatization is taking a government asset and opening it up to the market. The best example of what privatization can do for an economy is during the 1980s in the United Kingdom under Margaret Thatcher.
Imagine this. You wake up in your state-owned home, go to shower using state-owned water, get dressed and get into your state-owned car, then go to your state-owned job while the building is being powered by state-owned electricity, then you use your state-owned phone to call a state-owned travel agency to schedule a trip for your family too then go to a state-owned holiday camp. On your way home, you stop at a state-owned gas station and pump state-owned gas into your already state-owned car, and you then decide to go to the local state-owned bar to end the evening. This was the extent of how much of your life and your assets were owned by the government. Thatcher believed this to be egregious and downright unacceptable.
The government also was in charge of the shipbuilding industry, the steel industry, gas, water, electricity, telephones, and almost every major business in the country. After World War 2 Britain believed that the government's job was to provide cradle to grave services to the country no matter the cost, Thatcher disagreed. Following the 1983 election, she proceeded with the largest and most radical privatization program in history. Margaret believed in creating a culture of entrepreneurs and shareholders. Ingard Bernard, Mrs. Thatcher’s private secretary, said he remembered her saying, “I want every man and woman a capitalist.” Thatcher believed that the free market was far superior at bringing prosperity to a country rather than government-controlled and regulated markets. Her tactic for privatizing state assets would be that they would sell the shares of the company to the employees and it would allow them to also feel some part in the everyday financial life of the company. Later Thatcher would allow public-owned houses to be bought by their tenants. Kenneth Baker, a former minister under Thatcher later wrote in an article for the Financial Times “One of the key features of the Thatcher transformation was her privatization program which began first with council houses - giving to millions of people the chance of owning their own homes instead of renting them from the state. That is why so many people who had never voted Conservative before in their lives gave her three election victories.” (Financial Times and Baker).
Many saw this new policy as a lazy and dangerous thing for the government to do. They viewed it as a government selling off its responsibility rather than trying to fix the issue. Many also viewed this as selling public assets to greedy businessmen. This argument was later to be proven wrong, as Chris Edwards pointed out when he said “Studies in Britain and elsewhere have found that opening industries to competition are important to maximizing the productivity gains from privatization” (Cato Journal and Edwards 5).
The policy of privatization, while anathema to many on the left, has become synonymous with Thatcherism and was also followed by Tony Blair's government. Wider share-ownership and council house sales became known as "popular" capitalism to its supporters (a description coined by John Redwood). After the large-scale privatization, the British economy experienced one of the greatest booms in its history. In 1987 the Big Bang or Lawson Boom (named after Chancellor Nigel Lawson) happened. The United Kingdom's growth rate was more impressive, ranking first in the OECD-16 in 1987, a statistical achievement that Thatcher and her government exploited to the full in the general election campaign of that year (Economics Help).
Less Government in the economy has been shown to provide great benefit to a nation's economy and its consumers. Whether it be lowering taxes, cutting down government’s rules and regulations, or opening up failing government agencies to the market, all have been shown to provide countless benefits.