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Rich Danker: GOP Still Has Some Explaining to Do on the Economy

Fortunately, Republicans have a blueprint, circa the 1970s, to win back the electorate's trust

Republicans are beginning to feel good again now that the other side is against the ropes. President Barack Obama and the Democratic majority in Congress are reeling from the backlash against their health-care bill. The Democrats’ liberal overreach — on health care, cap and trade, and the stimulus — appear to have greased the wheels for a GOP comeback in next year’s midterm elections.

Rich Danker
Rich Danker

Yet Republicans haven’t suddenly refurbished their image through the Democrats’ missteps. The GOP still has not redressed the blame voters put on it for last year’s financial crisis. The economic tailspin that poisoned the end of George W. Bush’s presidency and sunk the chances of Sen. John McCain succeeding him broke the electorate’s trust in the Republican Party’s handling of the economy. It will take firm understanding and resolve to get it back. Fortunately, the GOP has a blueprint for doing so.

In October 1929, the stock market crash brought the Roaring Twenties to a halt. President Herbert Hoover spent the next three years making matters worse by restricting trade and raising taxes dramatically.

When Franklin Roosevelt took office in 1933, economic output had contracted 23 percent and the unemployment rate reached the same mark. Even though the Great Depression would continue on Roosevelt’s watch for seven more years, Hoover and his fellow Republicans in Congress were blamed for it.

For the next 48 years, the GOP carried water for Hoover, accepting the fault for the cataclysmic event and yet not bothering to figure out what he had done wrong. In fact, they largely repeated his interventionist, anti-growth policies. A string of economic failures — two recessions under President Dwight Eisenhower, Barry Goldwater’s defense of the 90 percent top tax rate in his blowout loss to Lyndon Johnson, Richard Nixon’s wage and price control scheme — littered their record.

It wasn’t until Ronald Reagan was elected in 1980 that voters trusted Republicans with the national economy again. Why? Reagan and his policymakers finally buried Hoover and the Great Depression.

Reagan’s proposal to bring down income and investment tax rates was the first major tax-cutting plan by a Republican presidential candidate since Calvin Coolidge. It was drawn up by New York Congressman Jack Kemp, who introduced the legislation in Congress in 1978.

By that point, a national tax revolt that had been simmering through the 1970s was under way. On June 6, 1978, California voters passed Proposition 13, which sharply restricted property taxes. The same day in New Jersey, Jeffrey Bell, a 34-year-old Vietnam veteran, defeated incumbent Clifford Case in the Republican Senate primary on a tax-cut platform. Bell’s top policy adviser was Jude Wanniski, a firebrand Wall Street Journal editorial page writer who resigned the next day after being spotted by a newspaper executive handing out leaflets for Bell.

In addition to persuading Kemp, Bell and scores of other Republicans on the merits of cutting taxes, Wanniski had made an incredible discovery of his own that did the most to put the past in its place.

While researching for his book on political economy, The Way the World Works, he found that the Great Crash of October 1929 correlated with the advancement of the Smoot-Hawley tariff legislation in Congress. The bill, which imposed tariffs on thousands of imports and prompted European countries retaliate, wasn’t signed into law until the middle of the next year. But Wanniski noticed that the increasing probability of its passage in Congress had induced a sell-off in stocks as traders anticipated the coming shutdown of world trade. The Great Crash, in other words, was a distress signal to Washington that went unheeded. Smoot-Hawley and Hoover’s subsequent tax hike were discovered to be the real economic factors that caused the Great Depression.

These ideas about taxes and trade propelled Reagan to the White House and revived the U.S. economy from the stagflation of the 1970s. With this rebirth of classical economic theory, dubbed “supply-side economics” by the phrase-savvy Wanniski, Republicans atoned for the mistakes of Hoover and regained credibility on the economy. For the first time in 36 years, the party gained control of the White House and the Senate. The following period of GOP dominance on both ends of Pennsylvania Avenue demonstrated the trust voters placed in it for those ideas.

This brings us back to the current mess.

Republicans still have not articulated a coherent explanation for the financial crisis of last fall; they don’t have one. Bush and McCain joined Democrats in excoriating the greed and overreach on Wall Street. Conservative Republicans blamed it on too much government spending during the Bush years. Few Republican lawmakers have considered monetary policy as a culprit.

Their torpor in searching for the truth leaves little hope that they will be able to resurrect voters’ trust in their handling of the economy. Much like Kemp and Reagan did in 1978, they should listen to outside voices carrying unconventional ideas. It shouldn’t take another half-century for Republicans to figure out what went wrong.

— Rich Danker is a graduate student at the Pepperdine School of Public Policy in Malibu.

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