Some time ago, I argued that President Obama’s economic policies were exactly the opposite of what he should be doing if he wanted to improve the American economy, and, when compared to Ronald Reagan, his policies are exactly the opposite of President Reagan’s economic policies. Back then, I predicted that Obamanomics would have the opposite results of Reaganomics. That prediction seems to be well on track.
In 1981, when Reagan entered office, he faced much worse economic problems than President Obama faced in 2009. Three worsening recessions starting in 1969 were about to culminate in the mother of all recessions 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 Democrat establishment policy wonks 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 this was accompanied by double-digit interest rates, with the prime rate peaking at 21.5% in 1980. The poverty rate started climbing in 1978, eventually going up an astounding 33%, from 11.4% to 15.2%. That’s a third more poor, for any fraction and percentage-challenged leftists who might be reading this. 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 extremely well-articulated, four-point simple to understand 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. Cut Spending, 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. Adopt an Anti-inflation, Strong-Dollar Monetary Policy, restraining the US 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 political 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, instead of a 33% boost in poverty under Carter, Nixon and Johnson, 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. That’s pretty much full employment the way we measure it.
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 contradictory, 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 his great book, The End of Prosperity, supply side guru Art Laffer and my friend, 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:
This period, 1982-2007, the twenty-five year boom–was 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, the net worth of US households 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. ALL Americans were much better off, and their taxes were lower, meaning they were keeping more of their income as wealth.
The most strikingly different thing about Obamanomics is how it so doggedly pursues the EXACT OPPOSITE of every one of these planks of Reaganomics. As I have often said, it is almost as if Obama’s policies were engineered to do exactly opposite of what Reagan’s policies did, meaning they were engineered to cause the economy to fail. While it’s hard to conceive of how anyone would purposely want America to fail, the evidence is quite staggering. Instead of reducing tax rates, President Obama is 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 proposed even 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 exactly the opposite as well. Instead of restraining the money supply to match money demand for a stable dollar, killing what has now become historic inflation once again, we have QE1 and QE2 and a steadily collapsing dollar, arguably creating a historic reflation.
And instead of deregulation we have across-the-board increases in regulations, from health care to finance to energy, and everywhere else. Ronald Reagan used to say his energy policy was designed to “unleash the private sector,” while Obama’s energy policy can only be described as being designed precisely to leash and bind the private sector in service to Obama’s central planning and ill-fated “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 now enjoying the second year of a roaring economic recovery, especially since, historically, the worse the downturn, the stronger the recovery. If the right policies were put in place, we should have come roaring back. 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 five 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. And it’s getting worse already this year.
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 rather than taming inflation, with the latest Producer Price Index data showing double-digit inflation again, and the latest CPI growing already half as much. If food and energy were back in the CPI those numbers would be through the roof, but Clinton ripped those measure out so it wouldn’t look so bad–another sham.
These are the reasons why the 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, Obama’s policies will kick off 25 years of economic stagnation, unless reversed.
We have a lot of work to do if we are to shovel out the barn he has filled with the manure of his policies and regulations.