I wish Obama could time travel back to 1980 …

President Obama disagrees with the past 30 years of U.S. economic policy. As he said during his Osawatomie, Kansas, speech last December:

… there is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes—especially for the wealthy—our economy will grow stronger. … But here’s the problem: It doesn’t work. It has never worked.

As I was mulling over this issue, I ran across a great blog post by economist Scott Sumner:

Suppose you had gotten a room full of economists together in 1980, and made the following predictions:

1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

2. Over the next 28 years Britain would overtake Germany and France in GDP per capita.

And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter. Indeed around that time most of the top British economists signed a petition asserting that Thatcher’s policies would fail.

For those of you not old enough to remember 1980, let me explain why. Labour rule of Britain had reduced their economy to a shambles. The government ran the big manufacturing corporations and labor unions were running wild. They had 83% [marginal tax rates, 98% on capital.] There was garbage piling up in the streets of London. Britain had been the sick man of Europe for decades, growing far more slowly than Germany, France and Italy.

The US wasn’t doing as badly, but certainly wasn’t doing that well either. We had also been growing much more slowly than Europe and Japan. Unlike Britain, we were still richer than most other developed countries, so this convergence was viewed as partly inevitable (the catch-up from WWII), and partly reflecting the superior economic model of the Germans and Japanese.

And here’s what happened over the following decades, as expressed in a chart looking at per capita income in terms of purchasing power parity:

Sumner’s big point is that the few countries that continued to gain on America were either more aggressive, pro-market reformers (Chile and Britain), or were developing countries that adopted the world’s most capitalist model.

See, few expected this. In 1980, there were plenty of forecasters who thought the American standard of living would decline over coming decades. Just look at all the dystopian films back then: Blade Runner, Soylent Green, Americathon, Escape from New York. Gloomy stuff.

But by the mid-1980s, those films were giving way to ones depicting a much sunnier tomorrow such as Back to the Future, Part II and the Star Trek revival. Indeed, from 1983-2007, U.S. real GDP grew by 3.3% a year, 2.2% on a per capital basis. Now, this was not as fast as the 1950s and 1960s when GDP growth averaged near 4%. But as Sumner explains, “Growth has been slower, but that’s true almost everywhere. What is important is that the neoliberal reforms in America have helped arrest our relative decline.

And the key reforms, by the way, are lower marginal tax rates and less intrusion by government into markets and the private sector via deregulation, eliminating price controls, and privatization.

Why would the president want to reverse course instead of recommitting America to the successful policies of the past decades?