Republican Economic Policies Overview
Do They Work?
Republican economic policies focus on what's good for businesses and investors. They say that prosperous companies will boost economic growth for everyone.
Republicans promote supply-side economics. That theory says reducing business, trade, and investment costs are the best way to increase growth. Investors buy more companies or stocks. Banks increase business lending. Owners invest in their operations and hire workers. These workers spend their wages, driving demand and economic growth.
Republicans define the American Dream as the right to pursue prosperity without government interference. That's achieved by self-discipline, enterprise, saving, and investment by individuals. Warren Harding said, "Less government in business and more business in government." Calvin Coolidge said, “The chief business of the American people is business.”
Herbert Hoover was a strong advocate of laissez-faire economic policies. He believed the free market would self-correct during the Great Depression. He felt that economic assistance would make people stop working. His biggest concern was keeping the budget balanced. Ronald Reagan said, "Government isn't the solution to our problems. Government is the problem."
Republicans favor tax cuts on businesses and high-income earners. They also promote tax cuts on capital gains and dividends to boost investment. The supply-side theory states that all tax cuts, whether for businesses or workers, spur economic growth. Trickle-down says that targeted tax cuts work better than general ones. It advocates cuts to corporate, capital gains, and savings taxes.
Trickle-down economics argues that the expansion generated by tax cuts is enough to broaden the tax base. In time, the increased revenue from a stronger economy offsets any initial revenue loss from the tax cuts.
For example, Republican President Donald Trump proposed income tax cuts. In 2018, the Tax Cuts and Jobs Act cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions. The top individual tax rate fell to 37 percent. It lowered the corporate tax rate from 35 percent to 21 percent. He advocated trickle-down economics when he said the cuts would eventually boost growth enough to make up for revenue loss.
Business-friendly fiscal policies include deregulation. Republicans don't want government interference with a free-market economy. When the free market is free to set prices, they often drop as a result. An unregulated market allows more innovation in industries from small niche entrepreneurs. Regulation can foster a too-cozy relationship between industries and their regulators. Over time, large businesses can gain control of their regulatory agencies. They then can create monopolies.
But deregulation has also backfired on Republicans. In 1999, a Republican-controlled Congress passed the Gramm-Leach-Bliley Act. It repealed a banking regulation called Glass-Steagall. It had prohibited retail banks from using deposits to fund risky stock market purchases. By 2005, commercial banks like Citigroup had invested in risky derivatives. That soon led to the 2008 financial crisis.
Republicans promise to cut spending on social programs such as welfare. They believe these programs reduce the initiative that drives capitalism.
Republicans want to get the government out of providing health care. Instead, they would provide tax credits to help people pay for private insurance. They would provide tax deductions for Health Savings Accounts. Instead of Medicaid, they would give the states block grants to use as they need. Many of these policies are reflected in President Donald Trump's plans to change health care.
The only government spending Republicans won't cut is defense. Instead, they are always in favor of increasing military spending. They argue that a strong defense is necessary to protect the nation. In addition, the Constitution supports the government's role in defense.
Republicans say they believe in fiscal responsibility. But they are just as likely as Democrats to increase the debt. For example, President Barack Obama increased the debt by $8.6 trillion. It was the most, dollar-wise. President George W. Bush was second, adding $5.8 trillion. Although Bush added less, he doubled the debt during his two terms. Every Republican president since Calvin Coolidge has added to the debt.
Republican presidents were in favor of trade protectionism until the devastating impact of the Smoot-Hawley Tariff Act. President Hoover signed the act to help U.S. industry during the Great Depression. But all other countries imposed their own tariffs in response. Global trade fell 66 percent. Since then, Republicans have been in favor of free trade agreements to help U.S. exporters in the global market.
Does It Work?
Republicans point to the Reagan administration as an example of how their policies worked. Reaganomics ended the 1980 recession. It suffered from stagflation, which is both double-digit unemployment and inflation.
Reagan cut income taxes from 70 percent to 28 percent for those earning $108,000 or more. He cut tax rates on middle-class incomes to 15 percent. He cut the corporate tax rate from 46 percent to 40 percent.
But Reagan also used non-Republican policies to end the recession. He increased government spending by 2.5 percent a year. He almost tripled the federal debt. It grew from $997 billion in 1981 to $2.85 trillion in 1989. Most of the new spending went to defense. But trickle-down economics, in its pure form, was never tested. It's more likely that massive government spending ended the recession.
The Bush administration also used Republican policies to end the 2001 recession. It cut income taxes with the Economic Growth and Tax Relief Reconciliation Act. That ended the recession in November, despite the 9/11 attacks. But unemployment continued rising to 6 percent. In 2003, Bush cut business taxes with the Jobs and Growth Tax Relief Reconciliation Act. It appeared that the tax cuts worked. But the Federal Reserve lowered the fed funds rate from 6 percent to 1 percent during this same period.
It's unclear whether tax cuts or another stimulus were what worked.
Another problem with the Reagan and Bush tax cuts is that they worsened income inequality. Between 1979 and 2005, after-tax income rose 6 percent for the bottom fifth of households. It rose 80 percent for the top fifth. Incomes tripled for the top 1 percent. It appears that prosperity didn't trickle down, it trickled up.
Both trickle-down and supply-side economists use the Laffer Curve to prove their theories. Arthur Laffer showed how tax cuts provide a powerful multiplication effect. Over time, they create enough growth to replace any lost government revenue. The expanded, prosperous economy provides a larger tax base.
But Laffer warned that this effect works best when taxes are in the "Prohibitive Range." Otherwise, tax cuts will only lower government revenue without stimulating economic growth. Republicans who say tax cuts always create growth ignore this aspect of supply-side economics.
One needs to see both sides of the coin to evaluate which party’s policies have been most beneficial. Find out how Republican presidents have implemented their party's policies and how Democratic presidents have impacted the economy.