Thursday, November 20, 2014

Obama Vs Reagan: No Contest

The Obama Economy vs. The Reagan Economy: It's Literally No Contest

Recently, readers were treated to a comparative analysis of the Reagan and Obama economies with the authors of these reviews reaching very different conclusions.

According to Forbes contributor Adam Hartung, “Obama Outperforms Reagan On Jobs, Growth And Investing.” However, Kyle Smith put forward a decidedly different point of view in “Sorry, Obama Fans: Reagan Did Better On Jobs And Growth.”

So, who got it right and who got it wrong?

Ronald Reagan was elected president largely on the promise that he could bring home our hostages being held in Iran while getting the nation out of the economic malaise—the result of a brutally upward inflationary spiral— gifted him by the Jimmy Carter Administration.

The hostage crisis was resolved quickly enough as those being held were released on the very day Reagan was sworn in as the nation’s 40th president.

To deal with the sluggish economy, Reagan proposed the Economic Tax Recovery Act, a bill that would dramatically cut personal and business taxes—designed to benefit the whole of the economy through the process of what we would come to know as supply-side economics—while reducing government spending (except for defense which remained untouched) and delivering a balanced federal budget.

Note that President Reagan was never able to make good on the promise of reducing government spending (discussed in a moment) nor balancing the federal budget.

Interestingly, while the Economic Tax Recovery Act would become the most sacred cornerstone of modern day Republican Party ideology, the ideas were not immediately taken to heart by many Congressional Republicans of Reagan’s era. These Members, along with most Democrats, were skeptical of an approach that was designed to improve the economy by making life harder on the nation’s poor, not to mention the fear that such policies could negatively impact their own political futures.

Nevertheless, and in no small measure the result of the sympathy felt for President Reagan when he was hit by an assassin’s bullet in July on 1981, the bill was passed into law approximately a month after the failed attempt on Reagan’s life.

Make no mistake—things most assuredly became harder for all but the wealthy who, as the primary beneficiaries of the across-the-board 24 percent tax cut, watched their net worth skyrocket as those less fortunate or less successful took a major hit.

With dramatic cuts to the social welfare safety net—including deep cuts even to the budget for kids who received their primary source of nourishment from school lunch programs—things were pretty grim for those without money. And they were about to get a whole lot worse as the Federal Reserve raised interest rates in response to the mad inflation that was growing annually at an astounding 14 percent.

Unable to borrow money at an interest rate they could afford, 17,000 businesses had failed by the fall of 1982 and unemployment reached record highs. With the national debt also at a record high, even supply-side gurus like David Stockman, Reagan’s budget director, pushed the President to raise taxes in order to put some money into the national treasury or face even greater debt as the nation would be forced to borrow to make up the difference.

Reagan agreed to rollback the corporate tax cuts and, to a much lesser extent, the individual income tax cuts. By the time he was finished with the adjustment, he had undone approximately one third of the tax cut put through the previous year.

As Reagan devotees will be quick to point out, things did, indeed, begin to get better in 1983 and, by election day in 1984, the growth in the economy had been so successful that President Reagan—whose approval in the polls during the peak of his recession had been lower than President Obama’s numbers today—won re-election in a landslide.

But was it the tax cuts and cuts to government welfare and services that were responsible for the rapid improvement in the economy?

This is where things get fuzzy as economics often do.