Modern America is consumed by a 24/7 news cycle, where the talking heads focus on one-sentence sound bites. Questions which end in the request to “please answer yes or no” pass for sophisticated journalistic inquiry. In such a system, we cannot hope to identify, let alone solve, problems. One side appeals to “Reaganomics”, the other to “Obamanomics,” yet neither side seeks to educate the public about Economics. Thus, in the current environment, elements of our society can use class warfare arguments to deflect scrutiny away from the serious, systematic issues that face our nation’s economy. Those who seek to solve the problem are called cruel and heartless, and the “Point/Counterpoint” media fosters a gladiator style theater to cheer on their respective combatants.

          In this environment, the Republican candidate for President of the United States must break through the cacophony of voices on the looming debt crisis. He or she must capture the attention of the American public, and then educate America as to the issues facing us in a way not seen since Ross Perot used charts to talk to the nation. Too many times, political consultants posing as credible media experts refer to economic “facts” which no one checks to hold these talking heads accountable.

To move forward to resolve the debt crisis, the Republican presidential candidate needs to educate the American People on the importance of private enterprise. We need a President who understands the truth of this principle. In 2012, those seeking the Presidency of the United States should heed the words of President John F. Kennedy – a Democrat - who said in his April, 1962 speech to the US Chamber of Commerce:[1]

If American business does not earn sufficient revenues to earn a fair profit, this Government cannot earn sufficient revenues to cover its outlays. If American business does not prosper and expand, this Government cannot make good its pledges of economic growth. Our foreign policies call for an increase in the sale of American goods abroad, but it is business, not Government, who must actually produce and sell these goods. (Emphasis added).

The Three Pillars of a 2020 Vision for Economic Education

Education for its own sake must first break through the noise of the 24/7 news cycle if it is to have a chance of succeeding. As we approach the debt precipice from which we seem drawn to leap to our doom, what is needed is a metaphor to illustrate the stark reality of our predicament. Perhaps a video like the following, which uses lemmings running en-mass off a cliff, can serve as a creative example to illustrate this concept:

To educate the American People on the issues facing us, we must come to grips with how Keynesian economic thinking has led us to the edge of the debt cliff. We need a President with a vision for what the year 2020 should look like. To begin this economic education of America in the 2012 election, the Republican Candidate for President must apply the following three pillars of economic understanding to help the voting public better understand how to deal with this crisis.

1. The “business cycle” is controlled more by the tidal forces of demographic change than by taxation and spending policy.

2. Examine the history of US tax policy to move beyond the rhetoric of “cut taxes” vs. “tax the rich.”

3. Recognize that more “stimulus spending” only creates more debt, and that true economic investment applies the principles articulated by John F. Kennedy, that if American business does not prosper and expand, this Government cannot make good its pledges of economic growth.

1. The Need to Better Understand What Drives the Business Cycle

When John Maynard Keynes wrote his General Theory, he got people to focus on short run economic events. While previous economists such as Adam Smith and John Baptiste Say had focused on the long run effect of economic forces, Keynes retorted “In the longrun, we’re all dead.” As the prophet to whom FDR turned to justify the New Deal, Keynes reformed economic thinking to believe that it was the duty of government to manage the economy. His chief tool: Short term government stimulus spending and tax policy.

However, Keynes quickly realized that because wages were “sticky downwards,” it wasn’t possible to reduce spending as easily as it was to increase spending. Therefore, deficit spending and borrowing were excused by economists who justified the practice, saying “we’re borrowing the money from ourselves.”

Thus, economists focused on short term business cycles tied to changes in government policies. However, at the same time Keynes was developing his theories, a Russian economist, Nikolai Kondratieff, wrote a book titled “The Major Economic Cycles.” He proposed what is now known as the “Kondratieff Long Wave Theory” that explained economic growth and decline by looking at the tidal forces caused by changing demographics.

In the accompanying graph, we see that births per 1,000 population peaked near the turn of the century in the early 1900s. Births have declined as infant mortality has fallen and life expectancy has increased, but even given that, we can see that birth rates bottomed out in the early 1930s and reached a new peak in the late 1940s and early 1950s before declining again to a low in the mid 1970s. Under the Long Wave Theory, these babies, when they grow up and enter the labor force, may face periods of higher unemployment (if born during years of peak birth rates), or relative low unemployment (if born during years of low birth rates).

U. S. Births Per 1,000 Population, 1909 – 2004

The Blue Segment is the Postwar Baby Boom.[2]

The following graph displays unemployment rates from 1890 to 2009. Notice that unemployment is high when “baby boom” generations born around 1900 and 1950 reach 30 years of age. Unemployment rates are relatively low for generations born around 1930 and 1980 during the “baby busts.”[3]

When viewed through the prism of long demographic waves, we can see that changes in the economy ebb and flow like ocean tides. We need to understand which types of economic policies go with, not against the tides. I’ll come back to this issue later in this essay. But first, we need to look at the second of our three pillars, and examine the history of tax policy in the US.

2. Examining History to Move Beyond the Rhetoric of Tax Policy

There are some who say we should raise taxes on the rich to dig our way out of the hole we’re in. But if raising taxes on the rich is the answer, then why stop there? In 2008, according to the CBO, US aggregate income was $7.8 trillion dollars.[4] Of that, 17.67% was earned by the top 1 percent of all income earners. That works out to be $1.38 trillion. What if we were to simply take all their money to pay off the debt? Because we have over $14 trillion of debt, we would have to confiscate 100% of the top 1 percent of the riches’ income for the next ten years.

Further detailed analysis, however, indicates that not all $1.38 trillion is actually “wage income” in the way most people think of income. According to the same CBO data (Table A7 of the excel page in footnote 4), we learn that 55.7% of the $1.38 trillion is considered wage income, while 28.3% is “Entrepreneurial Income” which is chiefly S. Corporation income. Therefore, if we take 100 percent of these people’s income, it is likely that a significant number of small business owners in America will have to close their businesses, meaning that many people will become unemployed.

To borrow a metaphor: That’s killing the goose that lays the golden egg!

In 1932, people had the same idea. They wanted to tax the rich, and so they increased taxes in the midst of a severe recession.

Comparison of Selected Tax Rates Before and After the Tax Act of 1932[5]

          Under Republican President, Herbert Hoover, the income tax wasn’t the only tax that was raised. In 1930, the United States passed the largest increase in tariffs ever recorded. The Smoot Hawley Tariff raised tariffs by 60%. Little progress was made in reducing tariffs until a Democrat took office. In 1962, Kennedy gained passage of the Trade Expansion Act, which eventually led to a 35% reduction in US tariffs. The Trade Expansion Act underscored Kennedy’s belief, quoted earlier, that “Our foreign policies call for an increase in the sale of American goods abroad, but it is business, not Government, who must actually produce and sell these goods.” But cutting tariffs and expanding global trade was not the only area where Kennedy sought to reduce taxes and free the US economy so it could grow.

Following the tax increases enacted under President Hoover, several successive administrations continued to increase taxes. When Kennedy became President, those making between $0 and $4,000 paid 20% in taxes, while those making over $200,000 paid the top rate, 91%. Throughout his presidency, JFK advocated a tax cut, and in a speech in September, 1963, said:[6]

Without a tax cut, there is at present no ascertainable prospect for reaching a balance. But with a tax cut, despite a temporary transitional increase in the deficit, this Nation can move within a very few years to an even higher trend of economic activity capable of sustaining both full employment and a balanced budget.

               A Republican, Herbert Hoover, thought that raising tariffs in 1930 and income taxes in 1932 would help the economy. Instead, this failed tax policy turned a recession into the Great Depression. It was not until a Democrat, John F. Kennedy, came into office, that we began to cut taxes, cut tariffs, and sought to trade with the rest of the world.

        And yet, in spite of this legacy of Kennedy as a tax cutter, the Democrats wish to become the new Herbert Hoovers of the 21^st century.

       In recent years, we have heard the mantra, “Bush cut taxes on the Rich.” Yes, the tax rate for the wealthiest Americans decreased from 39.5% to 35%. But, as the following table makes clear, President George W. Bush also cut taxes on the poorest Americans, as well as middle income earners.

Tax Rates, Married Filing Jointly, President Clinton vs. President Bush[7]

Under President Clinton, if you made $10,000, you paid 15% in taxes. Under President Bush, you had a 5% tax rate cut. Under President Clinton, if you made $50,000, you paid 27.5% in taxes. Under President Bush, you paid 15%. The point is simply this: It is misleading to say that “Bush cut taxes on the Rich”. He also cut taxes on everyone making less than $200,000. Thus, the “non-rich” also got a tax cut.

               In 2012, the Republican candidate for President needs to help educate the American People on the facts behind the rhetoric. When he or she does, we will - finally – be ready to move beyond the rhetoric of class warfare over tax policy to solve the problems facing our country.

3. More Stimulus Spending Creates More Debt

I was born in 1956, three years after my dad came home from the Korean war. In 1961, we moved out of an apartment and into a brand new house my parents had built. Like my folks, millions of other Americans did the same thing. Both my parents were born in 1931, near the bottom of the birth trend shown in the first graph. Their parents were born near the turn of the century, near the peak of the previous birth cycle.

When tax rates rose in 1932 and again in 1937, government made life much more difficult for people living in my grandparents’ generation. When my parents were starting to build their lives and my father was opening his Optometry practice, high taxes didn’t help, but they didn’t stop him from starting his business. The build-out of the Interstate Highway system of the 1950s was generating productivity gains in the economy. Because the rest of the world had been bombed back to the previous century, US manufacturing had no competition.

Never mind the fact that the top marginal tax rate in 1961 was 91 percent. Never mind that President Kennedy didn’t start seriously pushing for a tax cut until 1963, and that it was enacted after his assassination in November of that year. Never mind the fact that the Great Society programs of the Johnson Administration led to an explosion in government spending, adding endless bureaucracy to the American economy that in today’s economic climate would have seriously reduced economic growth. Never mind that at the same time as we had the war on poverty, we had the war in Viet Nam. Had we tried the same thing in 2010, we would have killed any hope for domestic economic growth.

Forget all those things, because in the years from 1946 to 1963, there was a “baby boom” going on. Those young families, just like my family, needed new houses, new appliances, new cars, and new clothes. The point: There was a demographic tidal wave taking place. Government policies could either “ride the wave” to facilitate demand for new goods and services, which is what the Kennedy tax cuts did, or be brushed away like a mosquito, which is what happened to the dramatic increase in government spending.

And just as people were pessimistic in the 1930s, the economy was in depression and few had real hope for the future, the economy of the 1960s was doing great. People were optimistic and wanted to start families, and nothing was going to get in the way of that. Today, once again, the economy looks bleak, the baby boom generation is looking at retiring, Americans are not optimistic, and young people are waiting to start families.

I believe that this observation holds an important insight for how we deal with the economy. We need to look at economic trends the same way we look at ocean tides. Tides come in, and they go out. You go surfing when the tide comes in – you ride the wave. You look for sea shells when the tide goes out. In both cases, you work with, not against, the tide.

          In the 1950s and 60s, it made sense to promote policies that made it easy to buy a home. You went WITH the tide of demographics. In the 1990s and 2000s, we came up with what’s been called the “sub-prime” home loan program to promote purchases of new homes. Not only was the sub-prime mortgage policy a bad idea, it tried to stimulate more home building at the same time the Baby Boom generation was wanting to sell existing houses. It DID NOT make sense to pursue this policy – it went AGAINST the tide of demographic change.

         In the 1950s, we built an interstate super highway system. In the 1990s, we built the Internet and the Online Super Highway. In 1996, we passed the Telecommunications Deregulation Act, which laid the foundation for investment in fiber optic communications and the backbone of high speed (instead of dial-up) Internet connectivity.

         The secret of these types of economic policies was that we applied the wisdom espoused by President Kennedy: To make sure that business could succeed so that the American government could make good on its goal of economic growth.

In 2012, we need a Presidential Candidate with 2020 vision who can make the case that the private sector, not the government sector, is the key to fueling the American economy in the 21^st Century. We should consider how we can win markets on a global scale, and not be content to only sell to Americans. We built the Online Super Highway. It’s time we learned how to use it to fuel our economy, instead of cowering from the rest of the world and trying to pretend that it does not exist.

Conclusion

              This is the challenge we face: To realize that because we are free, because we have an economic system that promotes competition, we can out produce the world. As Calvin Coolidge once said, “The business of America is business.” In 2012, we need a Republican candidate for President who can rekindle the vision of John F. Kennedy. In this Kennedy moment, he or she must help America rekindle its spirit, renew our nation, and lead us with a vision for 2020 to meet the challenges of the 21^st century.