Senate Democrats Miss the Point

On Monday July 11, Senate Democrats released their budget framework detailing their vision on tackling the looming debt crisis.  The framework begins with dire warnings of what will happen if we do not get our fiscal house in order: unsustainable debt levels, trillions in deficits and interest payments; all economic poison for years to come.  They even go so far to quote Admiral Mike Mullen saying that our national debt isn’t just an economic problem, but a dire national security issue.

But their solution is the biggest mistake that could be made:  tax increases.  In fact, they want tax increases on the “rich” (aka small business owners), those evil jet owners and the biggest and baddest of them all – oil and gas companies.  Their tax “fairness” proposal includes simplifying the tax code, improving the progressivity and fairness of code (i.e. shifting more of the burden to those already paying the lion’s share) and promoting economic growth. To quote, “one of these things is not like the other.”

They use the Clinton years as proof that they can promote economic growth by raising taxes. They point to the fact that the last time the top tax rate was 39.6% the United States experienced the longest period of uninterrupted economic growth in U.S. history with 39 quarters of economic growth and nearly 24 million jobs created.  By that logic, we should raise taxes to 80% and get double the growth!

What Senate Democratic leadership – and frankly all progressives seem to forget – is that one of the biggest drivers of economic growth doesn’t come from government, it comes from the price of energy, namely the cost of a barrel of oil.

The following chart is very illuminating (all prices are inflation adjusted to 2011 dollars):

Source: http://www.fintrend.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

A simple glance shows serious price stability after World War II up until the early 1970s.  Even with the overhang of the wars in Korea and Vietnam, not to mention the looming showdown with the Soviet Union, we know that those years were some of the most prosperous and economically stable decades of our recent history.  John F. Kennedy cut taxes, we went to the moon and Ray Kroc started McDonalds.  Reliable and stable energy prices as a result of affordable and accessible domestic production were a hallmark of this economic golden age.

In the 1970s the price of a barrel of oil skyrocketed.  Instability in the Middle East and progressive policies at home led to stagflation and a major shock to our economy.  Keynesian policies pumped cash into the economy to no avail while the top marginal tax rates hovered around 70%.  Price controls were instituted.  Lines at the gas pumps followed.  For those that remember that first lost decade can recall the malaise and sense of defeat that not only the American people had, but our leaders had as well.

It was not until Ronald Reagan came into office and took a machete to the entire federal edifice that things began to improve.  Just one week after his inauguration Reagan issued an executive order eliminating price controls and restrictive mandates on the oil and gas industry.  His energy policies, combined with slicing top tax rates by over 20%, added fuel to our economic fire.  Domestic oil and gas production went up, prices went down and we resumed growing the American economy by leaps and bounds.

The economic boom of the 1990s was driven by information technology and the growth of the telecommunication, computer and IT sectors.  The cost of a barrel of oil hovered around $30.  I can remember filling up my pickup truck for $13 and having enough money for dinner.  The development, production and operation of our leading IT companies – Microsoft, Yahoo!, AOL and Google – rely on abundant energy and since we had plenty at good prices that industry boomed.  Construction, retail, services all expanded and Americans were richer despite the wrongheaded tax increases of the decade.

There is no correlation between the high tax rates of the 1990s and our economic growth.  It wasn’t government investment or policies to “level the playing field”.  The simple truth is that our economic engine fueled by stable and affordable energy allowed the American people to deal with these high tax rates and prosper despite them.  So I cannot understand why Senate Democrats, surveying our current weak economic state, would toss aside over 60 years of history and seek to raise taxes on our oil and gas companies.

What we need is to unleash our entrepreneurial spirit and allow exploration and production right here in America.  We need to unshackle our economy and allow energy prices to fall so we can begin the next boom in American history; it will be that boom driven by our private sector that will create revenues to deal with our national debt.  Make no mistake, we must cut spending.  We must put our fiscal house in order.  But we shouldn’t, out of class envy or progressive utopia seeking, raise taxes on the very people and industries who will lead us into our next economic golden age.