How to weather our economic storm without capsizing

There is widespread dissatisfaction with the economy among Americans today, and no wonder: prices are rising faster than wages, and living standards have fallen. But America has already been in this economic storm, and our predecessors have left us a guide through these troubled waters.

The last time the United States had inflation this high and growth this low was more than 40 years ago. This malaise was created by the same deadly cocktail that caused our current problems: over-government spending, over-taxing, and over-regulating.

In the late 1970s, the leviathan federal government imposed a top income tax rate of 70 percent. Meanwhile, spending was higher than ever. Regulations were stifling the economy, especially the energy sector.

Because government spending far exceeded the Treasury’s ability to borrow, the Federal Reserve created money to finance the era’s runaway deficits. In this way, the government effectively raised revenue not only through overt, sky-high taxes, such as the federal income tax, but also through a hidden inflation tax.

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The government has confiscated so much of the income from individuals’ work, drastically reducing the incentives to work and invest. Burdensome and ineffective regulations have further increased costs without adding any reward.

Year after year, prices rose faster than wages, necessities like housing became more unaffordable, and living standards fell. Family budgets shrank as the federal budget grew.

Some people lost hope of a return to rapid economic growth, limiting the nation’s fate to perpetual mediocrity. The ideas—and ideals—of American exceptionalism, entrepreneurship, and rugged individualism no longer applied.

That changed when President Ronald Reagan preached a gospel of hope to a depressed nation. His credo included lower taxes and spending wherever possible, along with less burdensome regulation. Reagan prophesied that this would revive the economy and Americans’ standard of living.

He famously said that government is not the solution, but the cause of America’s problems. Reagan was able to get significant tax reform through Congress, including cutting the top tax rate by more than a quarter. His administration also launched a deregulation crusade to prevent government bureaucrats from interfering in the lives of Americans.

As a result, people became more willing to work, invest, invent, and accumulate wealth because they could keep a larger share of the income from their work.

As for the Federal Reserve, the central bank has retreated from its policies of financing budget deficits and manipulating interest rates. The painful return to normal monetary policy was chemotherapy and radiotherapy with the painful side effect of successive recessions, but it has ultimately removed cancerous inflation from the US economy.

Reagan’s predecessors in both political parties had implemented policies that directly and indirectly punished thrift, innovation, industriousness, and the accumulation of wealth. Reagan promised to reverse the anemic economic growth and high inflation caused by years of failed public policies.

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Like 40 years ago, today’s economic wounds are self-inflicted. The silver lining of this disease is that we, too, can reverse the negative effects simply by reversing the negative public policies that created them.

The Biden administration’s regulatory war on business, especially energy, must end if economic recovery is ever to reach middle America. Likewise, the big spenders in Congress — Democrats and Republicans alike — must be stopped before they drain the nation.

The federal debt is almost $35 trillion, and interest alone is more than 40% of all personal income taxes. Unless government spending is drastically reduced, even more confiscatory taxes will be needed just to service the debt without paying it off. That would truly destroy the incentive to work and invest.

Spending restraint is especially necessary for the Fed to combat inflation. Without spending reform, the central bank will continue to allow inflation to run rampant in order to finance multitrillion-dollar budget deficits. Remove wasteful spending, and the Fed’s greatest incentive to inflate disappears.

If these changes seem impossible today, recall that Reagan’s agenda seemed equally unlikely in 1980. In the spirit of his eternal optimism, America should remain hopeful that there is still a chance—perhaps just the last—to turn the tide.