Reaganomics vs. Obamanomics

Peter Ferrara had an excellent article in yesterday’s Wall Street Journal contrasting Reagan’s and Obama’s economic policies. Here are the key points of the article.

In his inaugural address, President Barack Obama said, “The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.”…

Unfortunately, this rhetoric is not true. Mr. Obama’s economic policy is following not what has been proven to work but liberal ideology.

The best way to understand this is to compare what’s being proposed now with what Ronald Reagan accomplished.

The four components of Reagan’s economic plan were:

“Across-the-board reductions in tax rates to provide incentives for saving, investment, entrepreneurship and work.”

“Deregulation to remove unnecessary costs on the economy.”

“The control of government spending.” (Nondefense discretionary spending was down 14.4% in 1988 compared to 1981 when Reagan took office.)

“Tight, anti-inflation monetary policy.”

The results of Reagan’s economic policy were remarkable. His policy worked. And this shouldn’t be a surprise to those familiar with the basic principles of economics. Ferrara states:

We know such policies work because they turned around in just two years an economy far worse than today’s. We were suffering from multiyear, double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes, and rising poverty. In fact, what we suffer with today is not the worst economy since the Great Depression, but the worst economy since Jimmy Carter — the last time liberals were dominant politically and intellectually.

But what is Obama’s plan?

The Obama administration’s economic policies do not include any of the four Reagan components. In fact, the stimulus plan is the greatest increase in government spending in the history of the planet. Meanwhile, the Fed is furiously reinflating, sowing more havoc down the line. Mr. Obama is still promising future increases in tax rates by letting the Bush tax cuts lapse, because for ideological reasons he thinks even current rates are too low. And instead of deregulating for more energy production, he is still promising massive increases in regulatory barriers — through global warming cap-and-trade legislation — to increased production from proven energy sources to serve an extreme environmentalist ideology.

What is the current result of Obama’s plan?

This is why America seems so hopeless right now, and so depressed. We are stuck going in exactly the wrong direction on economic policy because of currently dominant ideological fashions.

What will the longer-term results of Obama’s plan be?

A natural economic recovery will begin sometime this year, not because of the president’s policies, but because soon this will be the longest recession since World War II. However, thanks to the administration’s retrograde policies — cut from the cloth of the 1970s and even the 1930s — the recovery will not be what it should be. Rather, unemployment will remain too high, and inflation will resurge, recreating the disastrous economic results we suffered the last time Keynesian policies were dominant.

(HT: Justin Taylor)

February 12, 2009 | Filed Under Economics | 4 Comments

Comments

4 Responses to “Reaganomics vs. Obamanomics”

Renee on February 12th, 2009 10:20 am

1. The Tax Reductions led to tax increases and necessary budget cuts on the state and city level to make up what was lost.

2.The deregulation led to excessive industry advantages over both their workers and their investors. This is part of the meltdown issue no one is talking about.

3. Once again the lack of government spending on the federal level led to more spending/taxes on the lower level, it also led to Americans using credit and get rich quick schemes to make current and future ends meet. The defense spending was so great between Reagan and Bush 1 that Bill Clinton had to run on a cutting the deficit ticket.

4. It was a tight money policty, but not an anti inflation policy. The truth is the dollar had lost most of its value by the time Reagan was done, and now its worth even less.

IE in the 60′s-70′s you could buy a very nice and new 3-4 bedroom house for $25-40G in nearly every suberb in America, that same house, with no inmprovements to it, and barely none to the community, would cost you between 400,000-1,000,000 depending on the locale, today.

Granted Obama will make things worse, but your worship of reagan is disgusting. People suffered horribly under Reagan.

Trickle down economics doesnt work, trickle up economics doesnt work.
A healthy society(in terms of Economics)needs

1.the average citizen to have access to the knowledge and capital needed to spark lots of entrepeneuriship.

2.Fair taxes and regulations that dont hinder business, or put the worker back in the 19th century.

3.Low real inflation, and a good standard of living for the average citizen.

Without any of these you will have a stratified system which will lead to the people asking for (possibly demanding) socialism.

The best time in American history was the 50′s-60′s (with all of its problems). Since then, the American worker/investor has been shafted by the governemnt and the business communtiy. They are working together to make us serfs. Being African American, I know what its like to be the builder of a house I can’t live in, so I am able to see the big picture clearly, and before you do.
Matt Sees on February 12th, 2009 11:25 am

It seems this should be obvious to anyone with a basic understanding of economics and human motivation, yet clearly – and sadly – it’s not. And on a human level, it’s frustrating to recognize how little most of us can do about it. Which leads me first to pray for those in authority and thank God that he is ultimately in control, and leads me second to a practical question:

Given the expected results of the current administration’s economic policy, what is the wisest course of action for individuals?

In other words, how should the average American handle his or her family’s finances in such a way as to avoid the pitfalls (and tap into the opportunities) we should expect in the future? Focus on getting out of debt? Invest now while the market’s low? Buy gold? Build a bomb shelter?

I realize books could be (and probably have been) written about this, but I’d be curious to hear what principles you’d apply in this situation.
Matt on February 12th, 2009 3:04 pm

Matt: Great question. Here are a few (incomplete) thoughts on how the average American should be handling their finances right now:

1. Get out of debt. Those who have debt should seek to get it knocked out — and not just because of the current economic times, but no matter what the times are like. A mortgage would be an exception, but we should still seek to get those paid off as quickly as makes sense as well.

2. Save. Again, this is important in all economic environments. Hopefully the current environment can serve as a reminder of the importance of this.

3. Learn how to create a budget and stick to it. Paying off debt and saving don’t happen automatically. People should have a system to know where their money is going and how much they can allocate to different spending categories while still meeting their goals. Again, this is also important in good times as well as bad.

4. Give. Still give, in spite of the tough times. There are nuances here for those who are in deep debt and seeking to get out, I believe. But we shouldn’t stop being generous because of difficulty. And there are many ways to be giving — money is not the exclusive way.

5. Protect cash flow. Even with a lot of assets, one can go bankrupt without the necessary cash flow for meeting ongoing obligations. Here’s an example of how to apply this: If your car goes out and you have to get a different one, don’t empty out your savings to avoid debt on it. This is an instance where debt could be used wisely to preserve cash flow.

In other words, if you have $10k in savings, absolutely need a different car, and you can get one for $8k, don’t pay for it outright and only leave yourself $2k in savings. Instead, make a $2k down payment and take out a loan for the other $6k so that you can keep a sufficient level of cash in your savings. This is even more important in these economic times.

6. If you have 10 years or more before retirement, increase what you are putting into your retirement accounts if you can. The market will turn again. Investing as much as possible, after the above priorities are fulfilled, while the market is at the current level will likely result in very good returns over the long-haul — 10, 20, 30 years. Great opportunity here. And if the market doesn’t turn in that time frame, well I think that would mean the economy is so terribly bad that the lack of return on that extra investing would be the least of one’s problems.

7. I wouldn’t buy gold. Or a bomb shelter.

The interesting thing is that most of these principles are things we should be doing regardless of the economic times. The one major difference right now is the importance of being even more diligent to protect cash flow.
Matt Sees on February 12th, 2009 3:30 pm

Excellent counsel. I agree that cash flow protection is particularly important, and all too easily missed. Thanks!