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Reaganomics Vs.

Obamanomics: Facts And Figures


By PETER FERRARA

In February 2009 I wrote an article for The Wall Street Journal entitled “Reaganom
ics v Obamanomics,” which argued that the emerging outlines of President Obama’s eco
nomic 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 econo
mic problems than President Obama faced in 2009. Three worsening recessions sta
rting in 1969 were about to culminate in the worst of all in 1981-1982, with une
mployment soaring into double digits at a peak of 10.8%. At the same time Ameri
ca 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 co
uld 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, eve
ntually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real medi
an family income that began in 1978 snowballed to a decline of almost 10% by 198
2. 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 pr
ogram to reverse this slow motion collapse of the American economy:
1. Cut tax rates to restore incentives for economic growth, which was implement
ed first with a reduction in the top income tax rate of 70% down to 50%, and the
n a 25% across-the-board reduction in income tax rates for everyone. The 1986 t
ax 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 spe
nding cuts for the year today. In constant dollars, nondefense discretionary sp
ending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Mor
eover, in constant dollars, this nondefense discretionary spending never returne
d to its 1981 level for the rest of Reagan’s two terms! Even with the Reagan defe
nse buildup, which won the Cold War without firing a shot, total federal spendin
g declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 198
9. That’s a real reduction in the size of government relative to the economy of 1
0%.
3. Anti-inflation monetary policy restraining money supply growth compared to d
emand, to maintain a stronger, more stable dollar value.
4. Deregulation, which saved consumers an estimated $100 billion per year in lo
wer 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 w
orld history. The Reagan recovery started in official records in November 1982,
and lasted 92 months without a recession until July 1990, when the tax increase
s of the 1990 budget deal killed it. This set a new record for the longest peac
etime expansion ever, the previous high in peacetime being 58 months.
During this seven-year recovery, the economy grew by almost one-third, the equiv
alent of adding the entire economy of West Germany, the third-largest in the wor
ld 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 durin
g 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 unti
l recently. The contractionary, tight-money policies needed to kill this inflat
ion 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 th
e 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 i
ts peak. The stock market more than tripled in value from 1980 to 1990, a large
r increase than in any previous decade.
In The End of Prosperity, supply side guru Art Laffer and Wall Street Journal ch
ief 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 19
90 and 2001. They wrote:
We call this period, 1982-2007, the twenty-five year boom–the greatest period of w
ealth 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, mor
e wealth was created in America in the twenty-five year boom than in the previou
s 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, Pr
esident 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 t
ax rates will rise by nearly 20%, counting as well Obama’s proposed deduction phas
e-outs.
The capital gains tax rate will soar by nearly 60%, counting the new Obamacare t
axes going into effect that year. The total tax rate on corporate dividends wou
ld increase by nearly three times. The Medicare payroll tax would increase by 6
2% 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 alr
eady 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 mo
ney supply to match money demand for a stable dollar, slaying an historic inflat
ion, we have QE1 and QE2 and a steadily collapsing dollar, arguably creating a h
istoric 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 ene
rgy 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 “gr
een energy” dictates.
As a result, while the Reagan recovery averaged 7.1% economic growth over the fi
rst 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 rec
overy, 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 th
e Obama recovery, unemployment has fallen only 1.3 percentage points from its pe
ak, with a postwar record 45% long-term unemployed.
Previously the average recession since World War II lasted 10 months, with the l
ongest at 16 months. Yet today, 40 months after the last recession started, une
mployment is still 8.8%, with America suffering the longest period of unemployme
nt that high since the Great Depression. Based on the historic precedents Ameri
ca should be enjoying the second year of a roaring economic recovery by now, esp
ecially 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 wa
s the highest in the 51 years that Census has been recording the data.
Moreover, the Reagan recovery was achieved while taming a historic inflation, fo
r a period that continued for more than 25 years. By contrast, the less-than-ha
lf-hearted Obama recovery seems to be recreating inflation, with the latest Prod
ucer Price Index data showing double-digit inflation again, and the latest CPI g
rowing already half as much.
These are the reasons why economist John Lott has rightly said, “For the last coup
le of years, President Obama keeps claiming that the recession was the worst eco
nomy since the Great Depression. But this is not correct. This is the worst “rec
overy” since the Great Depression.”
However, the Reagan Recovery took off once the tax rate cuts were fully phased i
n. Similarly, the full results of Obamanomics won’t be in until his historic, com
prehensive tax rate increases of 2013 become effective. While the Reagan Recove
ry kicked off a historic 25-year economic boom, will the opposite policies of Ob
amanomics, once fully phased in, kick off 25 years of economic stagnation, unles
s reversed?
Peter Ferrara is director of policy for the Carleson Center for Public Policy an
d senior fellow for entitlement and budget policy at the Heartland Institute. H
e served in the White House Office of Policy Development under President Reagan,
and as associate deputy attorney general of the United States under President G
eorge H. W. Bush. He is the author of America’s Ticking Bankruptcy Bomb, forthcom
ing from HarperCollins.

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