WILLIAM W. BEACH THE HERITAGE FOUNDATION July, 2009 The Tale of Two Mental Models of Economic Growth

Two Policy Models The Mental Model of 1933 Government leads or supports economic growth by boosting income and consumption through its spending. The Mental Model of 1981 Government supports the growth of entrepreneurship by reducing tax and regulatory burdens.

The Mental Model of 1933

Government leads or supports economic growth by boosting income and consumption through its spending.

The Mental Model of 1981

Government supports the growth of entrepreneurship by reducing tax and regulatory burdens.

What is the Record of 1933

A More Recent Example of the Model of 1933

The Model of 1981 has a Better Record

What Starts Recessions? Recessions start in part because of public policy errors. Policy can re-enforce bad economic behavior or create incentives that undermine innovation Non-productive assets (labor and capital) must be rearranged to create value Thus, many assets must be “liquidated” or given new economic assignments.

Recessions start in part because of public policy errors.

Policy can re-enforce bad economic behavior or create incentives that undermine innovation

Non-productive assets (labor and capital) must be rearranged to create value

Thus, many assets must be “liquidated” or given new economic assignments.

What Ends Recessions? Economic evidence shows that two factors are important: Appropriate, timely actions by the monetary authorities to support transition in the financial sector. Reductions in the cost of capital and labor and the business costs associated with regulation. Entrepreneurs lead the way out of recessions because they discover how to reconfigure the productive assets of the economy.

Economic evidence shows that two factors are important:

Appropriate, timely actions by the monetary authorities to support transition in the financial sector.

Reductions in the cost of capital and labor and the business costs associated with regulation.

Entrepreneurs lead the way out of recessions because they discover how to reconfigure the productive assets of the economy.

What Can Congress Do? Example: Sen. Jim DeMint’s American Option tax plan. Reduces business taxes from 35 to 25 percent Simplifies tax rates to three: 10, 15, and 25 Reduces the death tax rate to 15 percent & $5 million exemption per person Makes the tax relief of 2001 and 2003 permanent

Example: Sen. Jim DeMint’s American Option tax plan.

Reduces business taxes from 35 to 25 percent

Simplifies tax rates to three: 10, 15, and 25

Reduces the death tax rate to 15 percent & $5 million exemption per person

Makes the tax relief of 2001 and 2003 permanent

Toe-to-Toe Who Wins? 1933 or 1981

P.S. How Big is Obama Plan

The most fundamental effect of this reckless spending are the mountains of debt