Pennsylvanians with high hopes that Governor Ed Rendell’s economic development policies will create a “new Pennsylvania” had better be prepared for disappointment. The new governor’s recent public comments make it clear that he hasn’t learned the paramount economic lesson of the past several decades—that tax cuts stimulate growth and increased government spending chokes it off.
In an effort to make the case for his “economic stimulus” plan, which calls for, in his words, “an unprecedented level of public (taxpayer) investment in Pennsylvania’s economy” and limited, “targeted” tax cuts, Governor Rendell runs afoul not only from the tenets of basic economics, but the lessons of history as well.
Pennsylvanians can’t say they weren’t warned. Prior to taking office, the governor assailed President Bush’s proposed tax cuts, asserting that “there’s been no evidence in my lifetime that ‘trickle-down economics’ works,” and went on to claim that “there’s no guarantee that the people who get these tax savings will invest it in the economy.” Finally, he suggested that such tax cuts inevitably lead to budget deficits.
There’s no doubt that Governor Rendell passionately believes what he says—but the facts simply aren’t on his side.
During Governor Rendell’s lifetime, there have been three primary examples of federal tax reductions—the Kennedy tax cuts of the 1960s, the Reagan tax cuts of the 1980s, and the Bush tax cuts of 2001. While it is obviously too soon to draw conclusions about the long-term effects of the Bush plan, there is ample data showing that both the Kennedy and the Reagan tax cuts did stimulate sustained economic growth.
In President Kennedy’s words, “an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget, just as it will never produce enough jobs or enough profits.” Kennedy’s 1962-63 tax cuts were dramatically positive for both the national economy and the federal treasury. Between 1961 and 1968, inflation-adjusted economic growth rose 42 percent, or more than 5 percent annually—and inflation-adjusted tax revenues increased by one-third.
President Reagan’s 1981-83 tax cuts stimulated a 17-year economic expansion, interrupted only by an eight-month downturn in 1990-91. During this period, the national economy grew at an average annual rate of 3.6 percent—more than double the 1.6 percent annual growth rate of the preceding ten years—and created 35 million new jobs.
In the 10-year period following the 1981-83 Reagan tax cuts, federal tax revenues more than doubled, from $517 billion in 1980 to more than $1 trillion in 1990. However, at the same time, federal spending rose even faster—from $591 billion in 1980 to more than $1.25 trillion in 1990. It is clear that the deficits of the 1980s were caused by overspending, not by a lack of tax revenues (a situation very similar to Pennsylvania’s present-day budget predicament).
These successful tax-cutting initiatives should serve as models for Governor Rendell as he begins his term. Yet despite the rhetoric of creating a “new Pennsylvania,” the governor’s economic philosophy eerily resembles the same “old” approach of the Commonwealth’s recent past.
In 2000, the Pennsylvania Legislative Budget and Finance Committee reported that while Pennsylvania was, as of 1998, the number one state in terms of overall taxpayer-funded “economic development” spending and fifth on a per-capita basis, it continued to fall well below the nationwide average in job and wage growth. If the past is any indication, Rendell’s “new” taxpayer-funded economic development borrowing initiatives and paltry, “targeted” tax cuts are likely to be met with the same lack of success.
In effect, Governor Rendell argues that allowing Pennsylvanians to keep more of their own hard-earned money is wrong because there’s no “guarantee” that taxpayers will invest it in the way he thinks that they should. Instead of “hoping that it trickles down,” he thinks government can craft a better central plan.
But with all due respect to the governor, it is no business of his how individual Pennsylvanians spend their own money, and furthermore, there is strong evidence that the private sector does a far better job than government at creating jobs and economic opportunity.
Pennsylvania’s economic struggles provide valuable lessons about government’s proper role in the lives of its citizens, and how high taxes contribute to government’s continuous encroachment into activities that are best left to private individuals, businesses, and non-profit groups. It’s not too late for Governor Rendell to learn history’s economic lessons, and to help create a truly “new Pennsylvania” that limits government spending to core responsibilities and relies on private decision-making, rather than government fiat, to generate economic growth.
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Grant R. Gulibon is senior policy analyst at The Commonwealth Foundation, a non-partisan, non-profit, public policy research and educational institute in Harrisburg, PA. For more information, visit www.CommonwealthFoundation.org.