How to Revive Prosperity

“People in economically free societies have better jobs and are less likely to live in poverty. They live longer and have healthier lives. They enjoy greater political freedom and can better defend their human rights.”
—Jim DeMint, preface to the 2016 Index of Economic Freedom


THE PAST YEAR HAS SEEN a wave of popular sentiment crest in American politics, a sentiment that perceives the economy as a rigged game, enriching the connected and impoverishing the common man.

This perception is accurate, but this system did not arise, as socialist demagogues are prone to declaim, because the federal grip on industry has been too soft or because politicians have been greedily holding back an avalanche of free services from the American people.

On the contrary, inequity in our economy and unaffordability of living arose hand-in-hand with government interference. In each crucial area of complaint, whether it has been a housing crisis, rising health insurance premiums, or expensive education, the government was there first, distorting free markets.

At the same time, each increase in federal oversight of a sector is accompanied by a regulatory regime that is paid for by Americans: first in tax dollars, then in compliance, and ultimately in lost jobs. Too often, this regime is designed by the biggest players in an industry, who construct federal rules for their own benefit.

Above it all, like a great smothering blanket, rests the labyrinthine tax regime of the Internal Revenue Service, an institution that fuels federal overreach by separating Americans from what they have earned.

It is perhaps no surprise that the United States has dropped from sixth to eleventh place in global economic freedom during the Obama administration, according to the 2016 Index of Economic Freedom.

In order to get a government that helps Americans prosper instead of helping itself prosper and an economy that provides opportunity for all and favoritism to none, the next Congress and President Donald Trump should take the following steps.

Restore Constitutional 
Government in America

Our federal government, as it currently operates, is unconstitutional. It violates both the letter and spirit of our Founding document in its mandates, regulations, and oversight of every conceivable aspect of American life.

Washington’s usurpation of those powers that were “reserved to the States respectively, or to the people” is objectionable enough on principle alone; progressive flirtation with despotic impulses is prone to excesses as offensive to liberty as those that prompted the American Revolution. But these violations are more dangerous than the hypothetical end of a slippery slope. They directly affect the prosperity of Americans in the here and now.

Federal agencies are prime offenders, often imposing regulations that make it harder to do business and hire workers. Whether the excuse is advancing “green” priorities, treating the Internet like a utility, or cracking down on disfavored industries such as firearms dealers, the agencies’ rules and restrictions inevitably hurt those who can least afford them.

In their report, “Red Tape Rising 2106,” James Gattuso and Diane Katz detail the growth of the administrative state in the past eight years:

The Obama administration is responsible for an unparalleled expansion of the regulatory state, with the imposition of 229 major regulations since 2009 at a cost of $108 billion annually (using the regulatory agencies’ own numbers). The actual costs are far greater, both because costs have not been fully quantified for a significant number of rules, and because many of the worst effects—the loss of freedom and opportunity, for example—are incalculable.

President Trump can curtail regulatory excess immediately by instructing agency heads to drop their most invasive regulations. Having allowed the federal “alphabet soup” agencies to determine national policy for too long, however, Congress must permanently reclaim its legislative prerogatives by limiting or eliminating those agencies that have become overly powerful.

To restore constitutional limits to our government and lessen its drain on our economy, the new administration and Congress must also be willing to balance the federal budget. Addiction to deficit spending enabled the rise of the regulatory regime in the first place, while the soaring national debt that it inevitably engenders casts a pall over the economy and threatens our ability to fund vital priorities like national defense.

Bringing the budget under control will necessarily entail reforming entitlements like Social Security, Medicare, and Medicaid. Together, retirement and health care programs accounted for half of all federal spending in 2015, and the costs of the programs’ benefits will eventually outstrip the resources available to pay them in the trust funds. As laid out in The Heritage Foundation’s Blueprint for Reform: A Comprehensive Policy Agenda for a New Administration in 2017, the key to fixing entitlements is to return the programs to a true insurance function, through reforms such as raising the Social Security retirement age and providing premium support for the purchase of private health insurance.

Cut and Simplify Taxes

Much as a mythical dragon preys on the livestock of farmers, the federal government is sustained by taxing the hard-earned livings of Americans. To starve the beast, its supply of taxes must be cut.

There are, of course, legitimate constitutional duties of the government that must be funded, such as providing for the common defense, overseeing interstate trade, managing the postal system, and paying the salaries of our elected officials. But Americans are all too familiar with what they sacrifice to sustain a government that has relentlessly grown far too burdensome. “The top individual income tax rate is 39.6 percent,” observes The Heritage Foundation’s 2016 Index of Economic Freedom, “and in the absence of comprehensive tax reform, the top corporate tax rate remains among the world’s highest at 35 percent. The overall tax burden equals 25.4 percent of total domestic income. Total government spending amounts to about 39 percent of GDP.”

And the economic cost is not limited to what is removed from our wallets on April 15. Clocking in at over 74,000 pages, the tax code is 58 times longer than the Bible and significantly harder to decipher. Countless hours of economic activity have been wasted in financial bibliomancy at the behest of the IRS.

Clocking in at over 74,000 pages, the tax code is 58 times longer than the Bible and significantly harder to decipher. Countless hours of economic activity have been wasted in financial bibliomancy at the behest of the IRS.

The tax dragon can be slain by leaders who are eager to let their fellow Americans create, keep, and share their wealth on their own terms. To accomplish this goal, however, these leaders will need to reduce the tax burden and, by so doing, expand the economy.

This burden can be reduced in several ways. Any moves to reduce individual and business rates are moves in the right direction, as are initiatives that couple rate cuts with simplification of the tax code. But for the economy, the way we pay taxes is almost as important as how much we are paying: A new administration and Congress can agree to move toward a consumption-based tax system instead of one that punishes investment, saving, or giving money to your children.

It also matters where we are taxed. The United States is one of the world’s few countries to tax profits made overseas, even if they have already been taxed by another country. This creates a perverse incentive for corporations to keep their foreign-generated earnings out of our economy. If he wishes to bring more money to America’s shores, President Trump will support a territorial tax system.

End Washington’s Crony Capitalism

Despite its numerous flaws, Washington’s interference in the American economy is not inherently anti-business any more than it is pro–free market. Instead, it promotes cronyism: the collusion of certain private interests with those of big government, serving to benefit those interests while expanding centralized power. In this way, self-styled progressive reformers see the same rigged system that conservatives and libertarians see, but the system is rigged because Washington occupies Wall Street, not because the government lacks control. As Jim DeMint has written in Opportunity for All, Favoritism to None:

For decades, each new scandal of private-sector malfeasance has been met with demands for increased oversight by government. In many cases, these demands are actually made by the leading banks, manufacturers, exporters, and technology giants themselves; they assist Washington in crafting a regulatory machine which ensconces them in protection from competition, under the guise of promoting sunshine and honesty.

The beneficiaries of this arrangement can be found in every industry, from corn and sugar to banking to Internet providers. Favoritism takes many forms, whether a direct subsidy, a tax credit, a bailout, or an entire regulatory system that makes compliance prohibitively expensive for small competitors.

In each case, the result is the same: Certain well-connected individuals and companies receive benefits that their countrymen do not. More often than not, the more complex and technologically advanced the industry, the greater the leeway given to the big players who are crafting the very regulations that supposedly keep them in check.

If President Trump wants to revive prosperity, he will neither attempt to shatter corporate America nor let it dictate policy, but rather will allow entrepreneurs to thrive alongside established businesses. Federal subsidies are a blot on American enterprise and must be eliminated.

Knee-jerk protectionism is a pernicious trap. The solution to foreign competition is not to make it harder to conduct business with the outside world, but to make it easier to do it in the United States.

At the same time, knee-jerk protectionism is a pernicious trap. The solution to foreign competition is not to make it harder to conduct business with the outside world, but to make it easier to do it in the United States. Congress should eliminate restrictions—tax, tariff, regulatory, or otherwise—that prevent Americans from disposing of their money and their businesses as they see fit. We are best served by competition, not by the lack of it. Among other things, Congress must once and for all end the Export–Import Bank, which is a classic example of crony capitalism. The Export-Import Bank underwrites foreign purchases of U.S. products. The beneficiaries of the bank are almost all large businesses who are thus given a leg up on their unsubsidized competitors. Battles like these are only signposts on the road to a free market.

Get Washington Out of 
the Energy Business

Washington’s appetite for picking winners and losers is doubly harmful when an unfortunate industry plays host to a proxy war for pop science and political moralizing. Few sectors experience this disruption as much as energy does.

Instead of allowing energy producers to supply Americans as cheaply and efficiently as possible, both Congress and various federal agencies—particularly the Environmental Protection Agency and the Department of Energy—have made it their mission to impose an apocalyptic view of climate science on energy policy.

This view has resulted in onerous regulatory burdens placed on fossil fuel producers while billions of taxpayer dollars are lavished on so-called green companies, whose business models range from merely unsustainable to utterly fraudulent.

Adding insult to injury, regulating non-toxic greenhouse gasses is all cost and no benefit, as The Heritage Foundation’s Solutions 2016 explains:

Along with a host of other regulations imposed by the EPA, these regulations will force coal power plants to close, driving up energy prices for American families and businesses and significantly reducing our ability to use an abundant natural resource. To make matters worse, even if one accepts catastrophic climate change, though evidence would suggest otherwise, the regulations will have no significant climate impact.

If climate change is a challenge to be tackled by American industry, it will be met best by a private sector with the freedom and resources to innovate, incentivized not by sticks and carrots, but by efficiency, local environments, and the needs of the American people. Regulation of carbon dioxide emissions should be eliminated.

If President Trump wishes to free energy producers to provide affordable electricity to our homes and infrastructure, he must be willing to open access to natural resources. As with so many other issues that benefit from local understanding and decision-making, Congress can devolve permitting for energy exploration to the states, which are the best judges of their own energy needs and environmental concerns.

Take Back the Dollar

Money is ideally a constant guarantor of value: Society’s agreement on an instrument of exchange hinges upon whether that instrument will be worth the same tomorrow as it is today. Thus, America’s prosperity depends on the quality of its money.

Yet there are few areas of national concern that are less accessible and of greater consequence to ordinary Americans than monetary policy as determined by the Federal Reserve.

Through most of America’s history, its currency was tied to the value of, and could be exchanged for fixed amounts of, gold and silver. Precious metals gave a floor to the U.S. dollar and predictability to its purchasing power. For the past half-century, however, the dollar has rested only on the faith and credit of the U.S. government, its value influenced by the Federal Reserve’s control of the money supply and national interest rates. Solutions 2016 explains the problem:

At its own discretion, the Fed buys Treasury securities in the open market to speed up the economy and sells them to slow down the economy. After six consecutive years of the Fed’s aggressive expansionary monetary policy, policymakers should start to question the effectiveness of this policy. These distortionary policies, rather than expanding the economy, have harmed its long-term health.

The Federal Reserve’s deliberations take place behind closed doors, its decisions made by an unelected board of governors appointed by the president. For decades, critics of this arrangement have been denounced as rubes and conspiracy theorists.

Now, as a growing number of national leaders and economists demand transparency in our monetary policy, the time is ripe to reassess the role and continued existence of the Federal Reserve’s broad powers. Step one is to switch to a short-term, rules-based system and take decisions out of the hands of unelected bureaucrats.

Americans are also best served when competition gives them choices. Their money is no exception, as Heritage Foundation analyst Norbert Michel explains in his paper “The Fed Needs Reform: Six Changes for Monetary Policy”:

[M]onetary policy is likely to be worse when shielded from competition, and better when competing against alternative monies. Congress can allow alternative currencies to flourish by removing several key barriers to entry in the market for money.

These barriers include capital gains taxes on alternative currencies, anti-money laundering laws that prevent alternative payments systems from working, and legal tender laws that make it impossible to write contracts for payment in alternative currencies.

If President Trump wishes to afford Americans the same freedom of choice they enjoy in their other economic activities, he will move to allow competing currencies and appoint a Federal Reserve chairman who does not mind a little competition.

You can find more information on how to revive American prosperity in the following publications from The Heritage Foundation:

Blueprint for a New Administration: Priorities for the President, November 1, 2016;

Blueprint for Reform: A Comprehensive Policy Agenda for a New Administration, July 14, 2016;

The 2016 Index of Culture and Opportunity, Jennifer Marshall and Rachel Sheffield, eds., July 12, 2016;

Red Tape Rising 2016: Obama Regs Top $100 Billion Annually, James L. Gattuso and Diane Katz, May 23, 2016;

Blueprint for Balance: A Federal Budget for 2017, February 23, 2016;

The 2016 Index of Economic Freedom, Terry Miller and Anthony Kim, eds., February 1, 2016;

Solutions 2016, January 2016;

Opportunity for All, Favoritism to None, August 2015;

The Budget Book: 106 Ways to Reduce the Size and Scope of Government, Brad Watson, Laura Trueman, and Rachel Greszler, eds., February 2015.