The Obama Nation versus the Reagan Sensation

Our current economic slowdown is being called the "Great Recession."  How often have you heard someone say the this economy is the worst since the Depression?  The economic problems we face today are enormous, but that does not mean that the problems are unparalleled in recent decades.  In terms of unemployment, the economy President Reagan faced in the early 1980s was actually worse than today's.

Unemployment, which stood at 7.8 percent when President Obama took office in January 2009, peaked at 10.0 percent near the end of that year and was at that level for just the one month.

Ronald Reagan inherited an unemployment rate of 7.5 percent in January 1981.  Unemployment, which peaked at 10.8 percent in 1982, was at 10 percent or higher for ten straight months.

These numbers suggest that President Reagan faced a jobs challenge at least as great as the present one.

Our current unemployment rate (May 2012) is 8.2 percent.  In May 1984, the corresponding month in President Reagan's first term, unemployment was down to 7.2 percent, a 3.6-percent drop (compared to a 1.8-percent decrease to date for President Obama).  Unemployment has declined only half as much under President Obama, and it has taken us longer to get there.

Both presidents relied on budget deficits to stimulate the economy, but the similarities end there.  President Reagan's deficits were much smaller.  Deficits during his first term averaged 4.3 percent of gross domestic product (GDP), compared to 9.1 percent of GDP during President Obama's first term.  President Obama's deficits, which have been twice as large as President Reagan's were, have produced only one half the reduction in the unemployment rate.

The differences between the two approaches go far beyond sheer magnitude.  President Obama has relied primarily on expanded federal expenditures, while President Reagan utilized tax cuts.  Federal expenditures during President Obama's first term have averaged 24.4 percent of GDP, compared to 22.8 percent during President Reagan's first term.  Deficits at today's levels have not been seen since World War II.

Keynesian economic theory suggests that fiscal policy can help reduce unemployment.  President Obama and other "demand-siders" favor increased government expenditures.  Under demand-side theory, increased federal spending creates jobs, and spending by those hired to work on government projects produces more jobs.

On the other hand, President Reagan and other "supply-siders" favor tax cuts over increased government spending.  According to supply-side advocates, tax cuts leave money in the hands of consumers, and their spending of that money creates additional jobs.

Shortly after taking office in early 2009, President Obama proposed what became an $831-billion stimulus package.  The law provided for spending on everything from infrastructure to energy to education and health.  Tax reductions made up only about one fourth of the stimulus package.  "Shovel-ready" projects were at the heart of the package.  Critics state that such projects take years to implement and that the benefit can come well after the recovery takes hold.  President Obama himself  eventually observed that there really is no such thing as a shovel-ready project.

In contrast, supply-siders argue that tax cuts coupled with reductions in withholding can immediately put money into the hands of consumers.

President Reagan did increase federal expenditures in the early years of his presidency, but not as an economic incentive.  President Reagan expanded the budget for the military, but by the end of his first term, economic growth had expanded GDP to the point that federal expenditures actually returned to exactly the same level as his first year in office (22.2 percent of GDP).  That happened because of economic growth.

Over his two terms in office, President Reagan reduced the top individual income tax bracket from 70 percent to 28 percent.  During that time, tax revenues grew at an average rate of 8.2 percent.  In contrast, President Obama has proposed increasing the top tax bracket from the current 35 percent to something significantly higher.  If his various proposals were enacted, the top tax bracket would be well over 50 percent.  President Obama himself has said that increasing taxes during an economic slowdown is the last thing we should do.  One wonders how these proposed tax increases are supposed to stimulate the economy.

How much have federal revenues grown under President Obama leadership?  They haven't.  They actually have decreased by 2 percent, or about one half of one percent per year.  He has a long way to go to catch up with President Reagan's two-term record.  The question that will be answered in November is whether voters are willing to give him that chance.  Perhaps, instead,  taxpayers will vote to "win one for the Gipper."

(Above unemployment figures are those reported by the Department of Labor.  Historical budget expenditures and revenue amounts are those of the White House's  Office of Management and Budget.  The 2012 expenditures and revenues are those projected by the Office of Management and Budget for the current fiscal year.)

Our current economic slowdown is being called the "Great Recession."  How often have you heard someone say the this economy is the worst since the Depression?  The economic problems we face today are enormous, but that does not mean that the problems are unparalleled in recent decades.  In terms of unemployment, the economy President Reagan faced in the early 1980s was actually worse than today's.

Unemployment, which stood at 7.8 percent when President Obama took office in January 2009, peaked at 10.0 percent near the end of that year and was at that level for just the one month.

Ronald Reagan inherited an unemployment rate of 7.5 percent in January 1981.  Unemployment, which peaked at 10.8 percent in 1982, was at 10 percent or higher for ten straight months.

These numbers suggest that President Reagan faced a jobs challenge at least as great as the present one.

Our current unemployment rate (May 2012) is 8.2 percent.  In May 1984, the corresponding month in President Reagan's first term, unemployment was down to 7.2 percent, a 3.6-percent drop (compared to a 1.8-percent decrease to date for President Obama).  Unemployment has declined only half as much under President Obama, and it has taken us longer to get there.

Both presidents relied on budget deficits to stimulate the economy, but the similarities end there.  President Reagan's deficits were much smaller.  Deficits during his first term averaged 4.3 percent of gross domestic product (GDP), compared to 9.1 percent of GDP during President Obama's first term.  President Obama's deficits, which have been twice as large as President Reagan's were, have produced only one half the reduction in the unemployment rate.

The differences between the two approaches go far beyond sheer magnitude.  President Obama has relied primarily on expanded federal expenditures, while President Reagan utilized tax cuts.  Federal expenditures during President Obama's first term have averaged 24.4 percent of GDP, compared to 22.8 percent during President Reagan's first term.  Deficits at today's levels have not been seen since World War II.

Keynesian economic theory suggests that fiscal policy can help reduce unemployment.  President Obama and other "demand-siders" favor increased government expenditures.  Under demand-side theory, increased federal spending creates jobs, and spending by those hired to work on government projects produces more jobs.

On the other hand, President Reagan and other "supply-siders" favor tax cuts over increased government spending.  According to supply-side advocates, tax cuts leave money in the hands of consumers, and their spending of that money creates additional jobs.

Shortly after taking office in early 2009, President Obama proposed what became an $831-billion stimulus package.  The law provided for spending on everything from infrastructure to energy to education and health.  Tax reductions made up only about one fourth of the stimulus package.  "Shovel-ready" projects were at the heart of the package.  Critics state that such projects take years to implement and that the benefit can come well after the recovery takes hold.  President Obama himself  eventually observed that there really is no such thing as a shovel-ready project.

In contrast, supply-siders argue that tax cuts coupled with reductions in withholding can immediately put money into the hands of consumers.

President Reagan did increase federal expenditures in the early years of his presidency, but not as an economic incentive.  President Reagan expanded the budget for the military, but by the end of his first term, economic growth had expanded GDP to the point that federal expenditures actually returned to exactly the same level as his first year in office (22.2 percent of GDP).  That happened because of economic growth.

Over his two terms in office, President Reagan reduced the top individual income tax bracket from 70 percent to 28 percent.  During that time, tax revenues grew at an average rate of 8.2 percent.  In contrast, President Obama has proposed increasing the top tax bracket from the current 35 percent to something significantly higher.  If his various proposals were enacted, the top tax bracket would be well over 50 percent.  President Obama himself has said that increasing taxes during an economic slowdown is the last thing we should do.  One wonders how these proposed tax increases are supposed to stimulate the economy.

How much have federal revenues grown under President Obama leadership?  They haven't.  They actually have decreased by 2 percent, or about one half of one percent per year.  He has a long way to go to catch up with President Reagan's two-term record.  The question that will be answered in November is whether voters are willing to give him that chance.  Perhaps, instead,  taxpayers will vote to "win one for the Gipper."

(Above unemployment figures are those reported by the Department of Labor.  Historical budget expenditures and revenue amounts are those of the White House's  Office of Management and Budget.  The 2012 expenditures and revenues are those projected by the Office of Management and Budget for the current fiscal year.)