Republican Views on the Economy
Republicans Economic Views and How They Work in the Real World
Republican economic policies focus on what's good for businesses and investors. Republicans say that prosperous companies will boost economic growth for everyone.
Republicans promote supply-side economics. That theory says reducing costs for business, trade, and investment is 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 both 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."
Here is a short list of the pros and cons of some Republican economic policies.
Tax cuts spur economic growth during a recession
Deregulation keeps government from stifling entrepreneurial innovation
Less welfare saves money
Tax credits can make health care more affordable for individuals
Provides continuing financial support for a strong military (although Democrats do this too)
Until recently, favored free trade agreements to help U.S. export into other countries
Reduces government aid, which forces some to go without essentials
The wealthy pay most of the taxes, so receive most of the tax-cut benefits
Deregulation allows firms to take on too much risk
Increases the national debt (although Democrat policies do this as well)
Supply-side economics doesn't work if tax rates are below 50%
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 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 signed the Tax Cuts and Jobs Act (TCJA). It cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions. The top individual tax rate fell to 37%. It lowered the corporate tax rate from 35% to 21%. Trump promised the cuts would eventually boost growth enough to make up for revenue loss.
The Joint Committee on Taxation said the TCJA increases the deficit by $1.1 trillion and will increase growth by 0.7% annually, reducing revenue loss by only $385 billion. That implies a continuing increase in the deficit—counter to Trump's claim.
Business-friendly fiscal policies include deregulation. Republicans don't want the government to interfere with a free-market economy. An unregulated market allows more innovation in industries from small niche entrepreneurs. Over time, large businesses can gain control of their regulatory agencies. They then can create monopolies.
In many cases, regulation is critical in controlling negative externalities, such as pollution, where there is a market failure. This is important in industries that produce pollution but are not charged for the consumption of clean air.
In 1999, a Republican-controlled Congress passed the Gramm-Leach-Bliley Act. It repealed the Glass-Steagall Act of 1933. It had prohibited retail banks from using deposits to fund risky stock market purchases. 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.
For example, Reagan spoke about the need for welfare reform. He blamed government assistance for causing broken families and making poverty worse.
President George W. Bush supported a welfare-to-work program. It required welfare recipients to work 40 hours per week.
Republicans want to get the government out of providing health care. Trump's health care policies reflect this by trying to repeal the Affordable Care Act (ACA). The TCJA eliminated the requirement that all Americans without health insurance must pay a penalty. The Trump administration also allowed states to impose work requirements on Medicaid recipients. The administration did not produce an alternative to the ACA that covered pre-existing conditions.
The only government spending Republicans won't cut is 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. In response, all other countries imposed their own tariffs. Global trade fell 66%, worsening the depression.
Since the Great Depression, Republicans have been in favor of free trade agreements to help U.S. exporters in the global market.
Reagan proposed the North American Free Trade Agreement (NAFTA), and it was negotiated under the Bush administration. The Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) was signed under the George W. Bush administration.
President Trump has returned to Hoover-era protectionist trade policies. He pulled out of the Trans-Pacific Partnership and imposed tariffs on steel and Chinese imports.
Does It Work?
Republicans point to the Reagan administration as an example of how their policies worked. Reaganomics ended the 1980-1982 recession. The economy suffered from stagflation, which is both double-digit unemployment and inflation.
Reagan cut the top tax rate from 70% to 50% in 1982. He cut the corporate tax rate from 46% to 40% in 1987.
Reagan also used non-Republican policies to end the recession. He increased government spending by 2.5% a year. He almost tripled the federal debt. It grew from $998 billion in 1981 to $2.86 trillion in 1989. Most of the new spending went to defense.
Trickle-down economics, in its pure form, was never tested under Reagan. It's more likely that massive government spending ended the recession.
George W. Bush used tax cuts to end the 2001 recession. They ended the recession in November 2001 despite the 9/11 attacks. Even though the recession was over, unemployment rose to 6.3% in June 2003. In 2003, Bush cut business taxes.
It's unclear whether tax cuts or monetary stimulus were what worked. In 2001, the Federal Reserve lowered the fed funds rate from 6% to 1.75%. That monetary policy also stimulated the economy.
Both trickle-down and supply-side economists use the Laffer Curve to prove their theories.
Economist 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.
Laffer warned that this effect works best when taxes are in the "Prohibitive Range." Otherwise, tax cuts will only lower government revenue without stimulating 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 are better for economic growth. Find out how Republican presidents have implemented their party's policies and how Democratic presidents have impacted the economy.