Reagan's Growth Lesson for Obama

The U.S. economy is plainly in trouble, and has been throughout this two-year-old "recovery."  Second-quarter growth was revised downward to 1.0%, after 0.4% in the first quarter.  The Labor Department says zero net jobs were created in August, and 57,000 fewer in June and July than earlier reported; unemployment stands at 9.1%, but would be 11.4% if the labor force headcount as of January 20, 2009 (President Obama's inauguration) were still extant, and more than 16% if discouraged and underemployed part-time workers were included.  The University of Michigan's end-of-August monthly Consumer Sentiment Survey is now at its lowest level since November 2008 -- not a good month, as readers here recall -- and over 6.2 million Americans have now been unemployed for six months or more, the largest percentage of the unemployed since World War II.  This is of course emotionally demoralizing and terribly detrimental to skills. 

Perhaps the most disturbing data point of all, however, is the second-quarter earnings report from Walmart (WMT).  While profits were up 5.7% year-over-year and the firm raised near-term guidance on earnings, same-store sales have declined now for nine consecutive quarters in the United States.  In an internal company survey of customers, Walmart found that 40% of its customers were holding off on buying or had already eliminated the intent to buy things they want or need, such as consumer durables.  And 15% of Walmart customers were from households that had "recently" experienced an involuntary job layoff.

That this iconic consumer goods giant, which now captures 10% of all non-automotive retail dollars in the U.S., has evinced such disquieting customer data for this extended a period is disheartening, but indicative of the times.  And it is not unrelated to corporate America's sitting on the sidelines with over $2 trillion in liquid assets, or the Fed's holding of $1.6 trillion in excess reserves from the commercial banking system in the U.S, or the moment-to-moment volatility on a confused and very uncertain Wall Street -- all of which more than explain the inability of 20 million Americans who want to work to remain sidelined, with several million more in part-time underemployment.

And all of this, too, leads to nonstop chatter in American households, on golf courses, in board rooms, and even in high school classrooms: how can we, quoting our favorite Democrat president of the 20th century, John F. Kennedy, get this country moving again?  And indeed, the world economy?  Why isn't the economy recovering after massive stimulus?

The short answer to this question is best summarized via a comparison of Reaganomics and Obamanomics, because these are the two canonical approaches to modern political economy.  In describing the very different approach Mr. Reagan took from that of his current counterpart, we see, plainly highlighted, the errors of the Obama administration that have brought us to seemingly endless torpor. 

The difference in the Obama and Reagan policy approaches stems from diametrically opposed economic philosophies, which in turn stem from different life experiences: Mr. Reagan spent 34 years in the private sector, including time as the head of a labor union, prior to becoming governor of California in 1966.  But Mr. Obama spent only his first year out of college in the private sector -- during which he wrote his mother that he felt as though he had "joined the enemy" -- before heading into non-profit "community organizing," a vacuous descriptor of an undefined profession involving political activism in which the main pursuit consists of procuring redistributive transfer payments from government.  This is not to say that Mr. Obama's efforts may not have been commendable -- let's assume they were -- but we merely point out here that Mr. Obama never managed or met a payroll, and never created a single private-sector job, prior to his ascension to the Oval Office. 

This diverse background in experience and worldview is seminal to their policy preferences and apprehension of how jobs and wealth are created, and how human progress occurs.  Critically, President Reagan understood -- in a way President Obama cannot hope to -- that the U.S. economy is composed of three hundred million individual and corporate agents making literally billions of decisions every day.  All of these agents have one thing in common: they seek to acquire or accomplish their ends facing pervasive scarcity of the means to do so, and a correlative scarcity in desired end goods themselves.  The economic challenge is how to create as much societal wealth as efficiently as possible, given this permanent challenge of scarcity.  Further, the knowledge of how best to make use of these scarce societal resources is embedded in the billions of decisions made every day, based on unique skills, reasoning, wisdom, obtainable relevant information, and "know-how" possessed by these hundreds of millions of agents -- all of whom also are uniquely endowed with knowledge and insights about "particular" local market conditions and consumer demand.

Mr. Reagan correctly reasoned, therefore, that no central planning bureaucracy in Washington, D.C. could ever hope to substitute for this matrix array of knowledge and skills dispersed across the country and, indeed, the globe.  So as a general matter, he rejected any primary role for government other than that of limited "umpire" in the production of the goods and services that bring us life, and wished to empower and incite these hundreds of millions of people to pursue their designs unfettered by the government.  The incentive-based profit motive combined with a supportive environment for production -- that is to say, low marginal tax rates, respect for property rights, sound money, entrepreneurship, and so on -- were all that was needed to unleash the energies of the people so as to produce an enduring boom and a vibrant, dynamic, job-creating economy.  Again, the current president has no understanding of any of this, and an inability to fathom it given his dearth of experience.  This ensures a permanent cluelessness when it comes to any sort of economic growth policy from Mr. Obama, and hence we see endless talk of government-led "stimulus" spending.

The former president had one other core insight unknown to the present commander-in-chief where the policy options to induce economic growth are concerned: he rejected the proposition so often made by elected officials that they can "grow the economy."  Rather, the economy grows.  And it grows -- that is to say, prosperity is brought about -- by increasing the supply of goods and services available to us all.  This is a critical point to understand.  By contrast, Mr. Obama asserts that he can "grow the economy" by inciting demand via increasing spending -- by the government, where needed.  President Reagan rejected this: he understood that production is the source of demand, and that we produce in order to consume.  As such, spending on consumption is, strictly speaking, an effect of economic growth, and not a cause.

Mr. Reagan recognized, and if he were alive would tell President Obama today, that the Obama stimulus policy is the result of a giant error of confusing this cause with effect.  Spending can result only from prior production that has generated income.  To allow the government to borrow (or, debase the currency via credit expansion and inflation) in order to spend merely commandeers resources from the private sector and redirects them: no new wealth, the "stuff" which confers both progress and enjoyment of life for people, is created via government spending.  At best, therefore, government stimulus is neutral in its effects, and likely wasteful and thus harmful, for reasons of mal-directed resources; unfounded, redundant, or purely unsound investment; and/or the moral hazard associated with the "rent-seeking" -- that is to say, cronyist and self-aggrandizing -- behaviors induced by the government's dispensing spending power or resources to favored recipients.  Further, for the economist, much of stimulus spending, in robbing resources and making them unavailable to the private sector, is tantamount to the consumption of capital or, said colloquially, eating the economy's seed corn.  Mr. Obama has ensured a lower standard of living tomorrow, via trillions in deficit spending today.

For Mr. Reagan, what all this reduced to was a policy mix designed to induce maximum production -- that is, supply of goods and services:

  • Tax cuts as incentives to increase work and output, raise incomes, and induce hiring
  • Government spending cuts to ensure that the maximum leeway for deployment of society's scarce resources was left to the millions of economic agents who best know where the unmet needs are, and how best to use these scarce resources
  • Sound money to encourage saving, capital accumulation, and long-term investment, by reducing uncertainty about currency value in the future, as well as ensuring an ability to accurately price goods and account for profit and loss (which in turn allows for judicious use of society's scarce resources -- sound money, in short, ensures that optimizing decisions are being made with scarce factors, and that waste is avoided)
  • Unrestricted trade with nations anywhere and everywhere, to foster lower consumer prices, wider array of goods, and specialty in production globally; this encourages a better division of labor as well as higher productivity
  • Reduced regulatory burdens, to cut through "red tape" and allow entrepreneurs to focus on business creation and expansion

This is the formula for strong and sustainable growth, which the world needs to rediscover to end the current torpor.   

Unfortunately, as former Reagan White House aide Peter Ferrara points out, in all five areas, current policy points the opposite way:

  • Taxes are set to increase dramatically in the near future, which will discourage production, work, and investment.  In 2013 the top two income tax rates will rise by nearly 20%, counting the proposed deduction phase-outs; the capital gains tax rate increases by 57%, counting the new Obamacare taxes going into effect that year.  The total tax rate on corporate dividends would increase from 15% to 39.6%.  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%.  And in two major speeches this year on this topic, President Obama has proposed still more tax increases.
  • Government spending has of course exploded, not only via the early-2009 stimulus bill of $862 billion, but additionally from expansion of baseline discretionary items, so that Mr. Obama is now attached to nearly 30% of the 235-year-old gross national debt.  That is to say, it took 232 years to accumulate a gross debt of $10 trillion; it has gone to $14.5 trillion three years later.  With all this spending have come the usual waste and distortions, not to mention criminality.
  • The Federal Reserve has made an explicit effort to debase the dollar for years now, with disastrous consequences for investment in the U.S.  In the last decade the dollar has seen its trade-weighted value decline by 38%, causing capital flight at a time when the U.S. economy has experienced a $12-trillion capital loss.  Mr. Obama's policy mix is the primary driver for both the expansion of the Fed's balance sheet by more than 200% during his tenure and the idle reserves held at the Fed due to fear of the future.
  • Trade agreements and promotion have stalled: Colombia's, Panama's, and South Korea's bilateral agreements have idled for Mr. Obama's entire presidency for no apparent reason other than union and domestic producer placation, at the expense of jobs, more consumer choice, and lower prices.  And there has been no effort to enshrine liberal trading patterns in an era of renewed protectionist threats.
  • Regulation of the private sector has increased dramatically in recent years beyond the well-known multi-trillion-dollar examples of the health care, financial services, and energy sectors.  In 2011 alone, the Obama administration has promulgated 219 new regulations that will cost the private sector more than $100 million, and seven that will be more than $1 billion each.  Many of these, beyond any absurdities involved, are stifling solid job creation: Boeing seeks to begin production at a new factory in South Carolina (after sinking a billion dollars into this new facility there and already hiring over 1,000 workers) but cannot, due to a fight with Mr. Obama's National Labor Relations Board, which is bothered by Boeing's lack of unionization -- never mind that the workers there themselves do not care about this, and want to begin working!

Mr. Obama's supporters are well aware that the Reagan comparison is a bad one for them, and to head it off next year, they are now saying this is a much worse recession, and one of an entirely different character from what Mr. Reagan inherited.  There is a kernel of truth to this in the sense that all situations in life are unique, and debt levels are indeed higher now.  But the core origin to both was massive monetary mismanagement, and in any case, Mr. Reagan inherited a disaster: the last two years of the Carter era were marked by 11-13% inflation, 20% interest rates, energy shortages, rising unemployment, calls for protectionism, and a Soviet beachhead in Central America, along with rising influence across Asia and the Persian Gulf, that guaranteed higher spending on defense.  Bluntly, Mr. Reagan answered the challenge and turned things around in remarkable fashion; Mr. Obama is trapped by a failed ideology that guarantees a sclerotic economy for years to come if nothing changes.

The uncomfortable truth is that among the five policy areas that affect economic growth -- tax, spending, monetary, trade, and regulatory -- the Obama administration is, alas, 0 for 5.  And for now, policy seems little likely to change, bringing no relief to millions who live in fear of a tougher future now, one that is infected with policies that are wholly antithetical to jobs and wealth creation.  The further uncomfortable reality is that there can be no real job-creation in the U.S. until Mr. Obama loses his.

Dr. Chapman is chief economist at Alhambra Investment Partners, a Miami-based wealth management firm.  He can be reached at John.Chapman@AlhambraPartners.com.

The U.S. economy is plainly in trouble, and has been throughout this two-year-old "recovery."  Second-quarter growth was revised downward to 1.0%, after 0.4% in the first quarter.  The Labor Department says zero net jobs were created in August, and 57,000 fewer in June and July than earlier reported; unemployment stands at 9.1%, but would be 11.4% if the labor force headcount as of January 20, 2009 (President Obama's inauguration) were still extant, and more than 16% if discouraged and underemployed part-time workers were included.  The University of Michigan's end-of-August monthly Consumer Sentiment Survey is now at its lowest level since November 2008 -- not a good month, as readers here recall -- and over 6.2 million Americans have now been unemployed for six months or more, the largest percentage of the unemployed since World War II.  This is of course emotionally demoralizing and terribly detrimental to skills. 

Perhaps the most disturbing data point of all, however, is the second-quarter earnings report from Walmart (WMT).  While profits were up 5.7% year-over-year and the firm raised near-term guidance on earnings, same-store sales have declined now for nine consecutive quarters in the United States.  In an internal company survey of customers, Walmart found that 40% of its customers were holding off on buying or had already eliminated the intent to buy things they want or need, such as consumer durables.  And 15% of Walmart customers were from households that had "recently" experienced an involuntary job layoff.

That this iconic consumer goods giant, which now captures 10% of all non-automotive retail dollars in the U.S., has evinced such disquieting customer data for this extended a period is disheartening, but indicative of the times.  And it is not unrelated to corporate America's sitting on the sidelines with over $2 trillion in liquid assets, or the Fed's holding of $1.6 trillion in excess reserves from the commercial banking system in the U.S, or the moment-to-moment volatility on a confused and very uncertain Wall Street -- all of which more than explain the inability of 20 million Americans who want to work to remain sidelined, with several million more in part-time underemployment.

And all of this, too, leads to nonstop chatter in American households, on golf courses, in board rooms, and even in high school classrooms: how can we, quoting our favorite Democrat president of the 20th century, John F. Kennedy, get this country moving again?  And indeed, the world economy?  Why isn't the economy recovering after massive stimulus?

The short answer to this question is best summarized via a comparison of Reaganomics and Obamanomics, because these are the two canonical approaches to modern political economy.  In describing the very different approach Mr. Reagan took from that of his current counterpart, we see, plainly highlighted, the errors of the Obama administration that have brought us to seemingly endless torpor. 

The difference in the Obama and Reagan policy approaches stems from diametrically opposed economic philosophies, which in turn stem from different life experiences: Mr. Reagan spent 34 years in the private sector, including time as the head of a labor union, prior to becoming governor of California in 1966.  But Mr. Obama spent only his first year out of college in the private sector -- during which he wrote his mother that he felt as though he had "joined the enemy" -- before heading into non-profit "community organizing," a vacuous descriptor of an undefined profession involving political activism in which the main pursuit consists of procuring redistributive transfer payments from government.  This is not to say that Mr. Obama's efforts may not have been commendable -- let's assume they were -- but we merely point out here that Mr. Obama never managed or met a payroll, and never created a single private-sector job, prior to his ascension to the Oval Office. 

This diverse background in experience and worldview is seminal to their policy preferences and apprehension of how jobs and wealth are created, and how human progress occurs.  Critically, President Reagan understood -- in a way President Obama cannot hope to -- that the U.S. economy is composed of three hundred million individual and corporate agents making literally billions of decisions every day.  All of these agents have one thing in common: they seek to acquire or accomplish their ends facing pervasive scarcity of the means to do so, and a correlative scarcity in desired end goods themselves.  The economic challenge is how to create as much societal wealth as efficiently as possible, given this permanent challenge of scarcity.  Further, the knowledge of how best to make use of these scarce societal resources is embedded in the billions of decisions made every day, based on unique skills, reasoning, wisdom, obtainable relevant information, and "know-how" possessed by these hundreds of millions of agents -- all of whom also are uniquely endowed with knowledge and insights about "particular" local market conditions and consumer demand.

Mr. Reagan correctly reasoned, therefore, that no central planning bureaucracy in Washington, D.C. could ever hope to substitute for this matrix array of knowledge and skills dispersed across the country and, indeed, the globe.  So as a general matter, he rejected any primary role for government other than that of limited "umpire" in the production of the goods and services that bring us life, and wished to empower and incite these hundreds of millions of people to pursue their designs unfettered by the government.  The incentive-based profit motive combined with a supportive environment for production -- that is to say, low marginal tax rates, respect for property rights, sound money, entrepreneurship, and so on -- were all that was needed to unleash the energies of the people so as to produce an enduring boom and a vibrant, dynamic, job-creating economy.  Again, the current president has no understanding of any of this, and an inability to fathom it given his dearth of experience.  This ensures a permanent cluelessness when it comes to any sort of economic growth policy from Mr. Obama, and hence we see endless talk of government-led "stimulus" spending.

The former president had one other core insight unknown to the present commander-in-chief where the policy options to induce economic growth are concerned: he rejected the proposition so often made by elected officials that they can "grow the economy."  Rather, the economy grows.  And it grows -- that is to say, prosperity is brought about -- by increasing the supply of goods and services available to us all.  This is a critical point to understand.  By contrast, Mr. Obama asserts that he can "grow the economy" by inciting demand via increasing spending -- by the government, where needed.  President Reagan rejected this: he understood that production is the source of demand, and that we produce in order to consume.  As such, spending on consumption is, strictly speaking, an effect of economic growth, and not a cause.

Mr. Reagan recognized, and if he were alive would tell President Obama today, that the Obama stimulus policy is the result of a giant error of confusing this cause with effect.  Spending can result only from prior production that has generated income.  To allow the government to borrow (or, debase the currency via credit expansion and inflation) in order to spend merely commandeers resources from the private sector and redirects them: no new wealth, the "stuff" which confers both progress and enjoyment of life for people, is created via government spending.  At best, therefore, government stimulus is neutral in its effects, and likely wasteful and thus harmful, for reasons of mal-directed resources; unfounded, redundant, or purely unsound investment; and/or the moral hazard associated with the "rent-seeking" -- that is to say, cronyist and self-aggrandizing -- behaviors induced by the government's dispensing spending power or resources to favored recipients.  Further, for the economist, much of stimulus spending, in robbing resources and making them unavailable to the private sector, is tantamount to the consumption of capital or, said colloquially, eating the economy's seed corn.  Mr. Obama has ensured a lower standard of living tomorrow, via trillions in deficit spending today.

For Mr. Reagan, what all this reduced to was a policy mix designed to induce maximum production -- that is, supply of goods and services:

  • Tax cuts as incentives to increase work and output, raise incomes, and induce hiring
  • Government spending cuts to ensure that the maximum leeway for deployment of society's scarce resources was left to the millions of economic agents who best know where the unmet needs are, and how best to use these scarce resources
  • Sound money to encourage saving, capital accumulation, and long-term investment, by reducing uncertainty about currency value in the future, as well as ensuring an ability to accurately price goods and account for profit and loss (which in turn allows for judicious use of society's scarce resources -- sound money, in short, ensures that optimizing decisions are being made with scarce factors, and that waste is avoided)
  • Unrestricted trade with nations anywhere and everywhere, to foster lower consumer prices, wider array of goods, and specialty in production globally; this encourages a better division of labor as well as higher productivity
  • Reduced regulatory burdens, to cut through "red tape" and allow entrepreneurs to focus on business creation and expansion

This is the formula for strong and sustainable growth, which the world needs to rediscover to end the current torpor.   

Unfortunately, as former Reagan White House aide Peter Ferrara points out, in all five areas, current policy points the opposite way:

  • Taxes are set to increase dramatically in the near future, which will discourage production, work, and investment.  In 2013 the top two income tax rates will rise by nearly 20%, counting the proposed deduction phase-outs; the capital gains tax rate increases by 57%, counting the new Obamacare taxes going into effect that year.  The total tax rate on corporate dividends would increase from 15% to 39.6%.  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%.  And in two major speeches this year on this topic, President Obama has proposed still more tax increases.
  • Government spending has of course exploded, not only via the early-2009 stimulus bill of $862 billion, but additionally from expansion of baseline discretionary items, so that Mr. Obama is now attached to nearly 30% of the 235-year-old gross national debt.  That is to say, it took 232 years to accumulate a gross debt of $10 trillion; it has gone to $14.5 trillion three years later.  With all this spending have come the usual waste and distortions, not to mention criminality.
  • The Federal Reserve has made an explicit effort to debase the dollar for years now, with disastrous consequences for investment in the U.S.  In the last decade the dollar has seen its trade-weighted value decline by 38%, causing capital flight at a time when the U.S. economy has experienced a $12-trillion capital loss.  Mr. Obama's policy mix is the primary driver for both the expansion of the Fed's balance sheet by more than 200% during his tenure and the idle reserves held at the Fed due to fear of the future.
  • Trade agreements and promotion have stalled: Colombia's, Panama's, and South Korea's bilateral agreements have idled for Mr. Obama's entire presidency for no apparent reason other than union and domestic producer placation, at the expense of jobs, more consumer choice, and lower prices.  And there has been no effort to enshrine liberal trading patterns in an era of renewed protectionist threats.
  • Regulation of the private sector has increased dramatically in recent years beyond the well-known multi-trillion-dollar examples of the health care, financial services, and energy sectors.  In 2011 alone, the Obama administration has promulgated 219 new regulations that will cost the private sector more than $100 million, and seven that will be more than $1 billion each.  Many of these, beyond any absurdities involved, are stifling solid job creation: Boeing seeks to begin production at a new factory in South Carolina (after sinking a billion dollars into this new facility there and already hiring over 1,000 workers) but cannot, due to a fight with Mr. Obama's National Labor Relations Board, which is bothered by Boeing's lack of unionization -- never mind that the workers there themselves do not care about this, and want to begin working!

Mr. Obama's supporters are well aware that the Reagan comparison is a bad one for them, and to head it off next year, they are now saying this is a much worse recession, and one of an entirely different character from what Mr. Reagan inherited.  There is a kernel of truth to this in the sense that all situations in life are unique, and debt levels are indeed higher now.  But the core origin to both was massive monetary mismanagement, and in any case, Mr. Reagan inherited a disaster: the last two years of the Carter era were marked by 11-13% inflation, 20% interest rates, energy shortages, rising unemployment, calls for protectionism, and a Soviet beachhead in Central America, along with rising influence across Asia and the Persian Gulf, that guaranteed higher spending on defense.  Bluntly, Mr. Reagan answered the challenge and turned things around in remarkable fashion; Mr. Obama is trapped by a failed ideology that guarantees a sclerotic economy for years to come if nothing changes.

The uncomfortable truth is that among the five policy areas that affect economic growth -- tax, spending, monetary, trade, and regulatory -- the Obama administration is, alas, 0 for 5.  And for now, policy seems little likely to change, bringing no relief to millions who live in fear of a tougher future now, one that is infected with policies that are wholly antithetical to jobs and wealth creation.  The further uncomfortable reality is that there can be no real job-creation in the U.S. until Mr. Obama loses his.

Dr. Chapman is chief economist at Alhambra Investment Partners, a Miami-based wealth management firm.  He can be reached at John.Chapman@AlhambraPartners.com.