The GOP Might Have Discovered a Pro-Growth Strategy by Larry Kudlow 29 May 2011 post a comment Share This: House Majority Leader Eric Cantor turned the policy temperature down on austerity this week by rolling out a strong economic-growth agenda. Headlined by a 25 percent top tax rate for individuals and business, the Cantor package includes regulatory relief, free trade, and patent protection for entrepreneurs. It’s job creation and the economy, stupid. Sounds Reaganesque? Well, Eric Cantor has a lot of Reagan blood in him. Back in 1980, while Cantor was still in high school, his father was the Virginia state treasurer of the Ronald Reagan presidential campaign. So the apple never falls far from the tree. In fact, it looks like Cantor is restoring the supply-side incentive model of economic growth. Forget tax-the-rich class warfare. Throw out wild-eyed government-spending stimulus and dollar-depreciating Fed money-pumping. Make it pay more after tax to work, produce, and invest. Go for a growth spurt, something the economy badly needs. And -- my thought -- crown such a growth strategy with a stable King Dollar re-linked to gold. When I interviewed Cantor this week, he made it clear that faster economic growth was crucial to holding down spending, deficits, and debt. As scored by the CBO, every 1 percent of faster growth lowers the budget gap by nearly $3 trillion from lower spending and higher revenues. “Grow the economy,” Cantor said. “It will help us manage-down the deficit and it will help get people back to work.” This is not to say that spending cuts and structural entitlement reforms aren’t necessary. They are. But it is to argue that lately the GOP has forgotten the growth component that is so essential to spending restraint and deficit reduction. The GOP should say: In return for substantial federal-spending cuts, we’re gonna more than make it up to you with large tax cuts. You will win. Big government will lose. I suggested to Cantor that the GOP adopt a 5 percent national growth target, which President John F. Kennedy had when he launched his across-the-board tax cuts in the early 1960s. “That is a fantastic goal,” he told me. Cantor’s growth plan is very timely as the U.S. economy is once again sputtering. In what is already one of the weakest post-recession recoveries in the postwar era, first-quarter GDP came in at a tepid 1.8 percent. Many economists believe the second quarter will be no better. And consider this: Between 1947 and 2000, average real economic growth registered 3.4 percent yearly -- an excellent prosperity baseline. Yet over the past ten years -- amidst boom-bust Fed policy, a collapsing dollar, and soaring gold -- the stock market on balance hasn’t moved as the economy has averaged only 1.7 percent annually. Because of the ongoing slump, actual real GDP growth from the early 2000s through the first quarter of 2011 has dropped nearly 17 percent below the long-run historical trend. That translates to a massive output gap of $2.7 trillion. In order to close that gap in five years the economy would have to grow 7.3 percent annually (roughly Reagan’s two-year recovery rate in 1983-84). To close the gap in ten years, the economy would have to grow near 5.3 percent annually. Alright, so why not establish a national economic growth target of over 5 percent? That might wipe out the current spirit of economic pessimism and decline. A 5 percent growth target might give some hope to the roughly 15 million unemployed. Or the 12 to 15 million homeowners who can’t meet their mortgages, are in foreclosure, or have upside-down property values. Or the disappointed investors who haven’t made any real cash in ten years. Or the families who are suffering from rising gas and food prices. A 5 percent growth target might wipe out the sense that we can’t seem to right the economic ship. For all these reasons, according to the polls, jobs and the economy are the number one political issue today. Entitlements are going to have to be fixed. But that day of reckoning is nearly 20 years away. Right now folks want work and income to pay the bills. The brilliance of Mr. Cantor’s effort is his attempt to move the GOP back to the economic-growth high ground. It is our most urgent priority.