Peter Ferrara
In February 2009 I wrote an article for
The Wall Street Journal
entitled “Reaganomics v Obamanomics,” which argued that the emerging
outlines of President Obama’s economic policies were following in close detail
exactly the opposite of President Reagan’s economic policies. As a result, I
predicted that Obamanomics would have the opposite results of Reaganomics. That
prediction seems to be on track.
When President Reagan entered office in 1981, he faced actually much worse
economic problems than President Obama faced in 2009. Three worsening
recessions starting in 1969 were about to culminate in the worst of all in
1981-1982, with unemployment soaring into double digits at a peak of 10.8%. At
the same time America suffered roaring double-digit inflation, with the CPI
registering at 11.3% in 1979 and 13.5% in 1980 (25% in two years). The
Washington establishment at the time argued that this inflation was now endemic
to the American economy, and could not be stopped, at least not without a
calamitous economic collapse.
All of the above was accompanied by double -igit interest rates, with the
prime rate peaking at 21.5% in 1980. The poverty rate started increasing in
1978, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in
real median family income that began in 1978 snowballed to a decline of almost
10% by 1982. In addition, from 1968 to 1982, the Dow Jones industrial average
lost 70% of its real value, reflecting an overall collapse of stocks.
President Reagan campaigned on an explicitly articulated, four-point economic
program to reverse this slow motion collapse of the American economy:
1. Cut tax rates
to restore incentives for economic growth, which
was implemented first with a reduction in the top income tax rate of 70% down to
50%, and then a 25% across-the-board reduction in income tax rates for
everyone. The 1986 tax reform then reduced tax rates further, leaving just two
rates, 28% and 15%.
2. Spending reductions, including a $31 billion cut in spending in 1981,
close to 5% of the federal budget then, or the equivalent of about $175 billion
in spending cuts for the year today. In constant dollars, nondefense
discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from
1981 to 1983. Moreover, in constant dollars, this nondefense discretionary
spending never returned to its 1981 level for the rest of Reagan’s two terms!
Even with the Reagan defense buildup, which won the Cold War without firing a
shot, total federal spending declined from a high of 23.5% of GDP in 1983 to
21.3% in 1988 and 21.2% in 1989. That’s a real reduction in the size of
government relative to the economy of 10%.
3. Anti-inflation monetary policy restraining money supply growth compared
to demand, to maintain a stronger, more stable dollar value.
4. Deregulation, which saved consumers an estimated $100 billion per year in
lower prices. Reagan’s first executive order, in fact, eliminated price
controls on oil and natural gas. Production soared, and aided by a strong
dollar the price of oil declined by more than 50%.
These economic policies amounted to the most successful economic experiment
in world history. The Reagan recovery started in official records in November
1982, and lasted 92 months without a recession until July 1990, when the tax
increases of the 1990 budget deal killed it. This set a new record for the
longest peacetime expansion ever, the previous high in peacetime being 58
months.
During this seven-year recovery, the economy grew by almost one-third, the
equivalent of adding the entire economy of West Germany, the third-largest in
the world at the time, to the U.S. economy. In 1984 alone real economic growth
boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were
created during the recovery, increasing U.S. civilian employment by almost 20%.
Unemployment fell to 5.3% by 1989.
The shocking rise in
inflation during the Nixon and Carter years was reversed. Astoundingly,
inflation from 1980 was reduced by more than half by 1982, to 6.2%. It was cut
in half again for 1983, to 3.2%, never to be heard from again until recently.
The contractionary, tight-money policies needed to kill this inflation
inexorably created the steep recession of 1981 to 1982, which is why Reagan did
not suffer politically catastrophic blame for that recession.
Real per-capita disposable income increased by 18% from 1982 to 1989, meaning
the American standard of living increased by almost 20% in just seven years.
The poverty rate declined every year from 1984 to 1989, dropping by one-sixth
from its peak. The stock market more than tripled in value from 1980 to 1990, a
larger increase than in any previous decade.
In
The End of Prosperity, supply side guru Art Laffer and
Wall
Street Journal chief financial writer Steve Moore point out that this
Reagan recovery grew into a 25-year boom, with just slight interruptions by
shallow, short recessions in 1990 and 2001. They wrote:
We call this period, 1982-2007, the twenty-five year boom–the greatest period
of wealth creation in the history of the planet. In 1980, the net worth–assets
minus liabilities–of all U.S. households and business … was $25 trillion in
today’s dollars. By 2007, … net worth was just shy of $57 trillion. Adjusting
for inflation, more wealth was created in America in the twenty-five year boom
than in the previous two hundred years.
What is so striking about Obamanomics is how it so doggedly pursues the
opposite of every one of these planks of Reaganomics. Instead of reducing tax
rates, President Obama is committed to raising the top tax rates of virtually
every major federal tax. As already enacted into current law, in 2013 the top
two income tax rates will rise by nearly 20%, counting as well Obama’s proposed
deduction phase-outs.
The capital gains tax rate will soar by nearly 60%, counting the new
Obamacare taxes going into effect that year. The total tax rate on corporate
dividends would increase by nearly three times. The Medicare payroll tax would
increase by 62% for the nation’s job creators and investors. The death tax rate
would go back up to 55%. In his 2012 budget and his recent national budget
speech, President Obama proposes still more tax increases.
Instead of coming into office with spending cuts, President Obama’s first act
was a nearly $1 trillion stimulus bill. In his first two years in office he has
already increased federal spending by 28%, and his 2012 budget proposes to
increase federal spending by another 57% by 2021.
His monetary policy is just the opposite as well. Instead of restraining the
money supply to match money demand for a stable dollar, slaying an historic
inflation, we have QE1 and QE2 and a steadily collapsing dollar, arguably
creating a historic reflation.
And instead of deregulation we have across-the-board re-regulation, from
health care to finance to energy, and elsewhere. While Reagan used to say that
his energy policy was to “unleash the private sector,” Obama’s energy policy can
be described as precisely to
leash the private sector in service to
Obama’s central planning “green energy” dictates.
As a result, while the Reagan recovery averaged 7.1% economic growth over the
first seven quarters, the Obama recovery has produced less than half that at
2.8%, with the last quarter at a dismal 1.8%. After seven quarters of the
Reagan recovery, unemployment had fallen 3.3 percentage points from its peak to
7.5%, with only 18% unemployed long-term for 27 weeks or more. After seven
quarters of the Obama recovery, unemployment has fallen only 1.3 percentage
points from its peak, with a postwar record 45% long-term unemployed.
Previously the average recession since World War II lasted 10 months, with
the longest at 16 months. Yet today, 40 months after the last recession
started, unemployment is still 8.8%, with America suffering the longest period
of unemployment that high since the Great Depression. Based on the historic
precedents America should be enjoying the second year of a roaring economic
recovery by now, especially since, historically, the worse the downturn, the
stronger the recovery. Yet while in the Reagan recovery the economy soared past
the previous GDP peak after six months, in the Obama recovery that didn’t happen
for three years. Last year the Census Bureau reported that the total number of
Americans in poverty was the highest in the 51 years that Census has been
recording the data.
Moreover, the Reagan recovery was achieved while taming a historic inflation,
for a period that continued for more than 25 years. By contrast, the
less-than-half-hearted Obama recovery seems to be recreating inflation, with the
latest Producer Price Index data showing double-digit inflation again, and the
latest CPI growing already half as much.
These are the reasons why economist John Lott has rightly said, “For the last
couple of years, President Obama keeps claiming that the recession was the worst
economy since the Great Depression. But this is not correct. This is the worst
“recovery” since the Great Depression.”
However, the Reagan Recovery took off once the tax rate cuts were fully
phased in. Similarly, the full results of Obamanomics won’t be in until his
historic, comprehensive tax rate increases of 2013 become effective. While the
Reagan Recovery kicked off a historic 25-year economic boom, will the opposite
policies of Obamanomics, once fully phased in, kick off 25 years of economic
stagnation, unless reversed?
Peter Ferrara is director of policy for the Carleson Center for Public
Policy and senior fellow for entitlement and budget policy at the Heartland
Institute. He served in the White House Office of Policy Development under
President Reagan, and as associate deputy attorney general of the United States
under President George H. W. Bush. He is the author of America’s Ticking
Bankruptcy Bomb
, forthcoming from HarperCollins.
