James Pethokoukis and Joe Weisenthal have been arguing over who presided over the more impressive recovery: Barack Obama or Ronald Reagan?
This is, I think, a mostly useless exercise. Obama and Reagan presided over different kinds of recessions that began at different times and ended in different ways. Imagine you had two doctors, one who had treated a patient for a drug overdose, and another who was treating a patient who recently suffered a heart attack. Would flatly comparing the speed of the two patients’ recoveries tell you anything about the doctors? Of course not. So too with Obama and Reagan. But if you do want to compare the two presidents, here are some things to keep in mind:
A 900-pound statue of former President Ronald Reagan is viewed Nov. 1, 2011, shortly after being unveiled during ceremonies dedicating the new statue at Reagan National Airport in Washington,DC. (PAUL J. RICHARDS - AFP/GETTY IMAGES) The 1982 recession and the 2008 financial crisis were not the same. In the early-1980s, the country was fighting a decade of stagflation. Paul Volcker, the chairman of the Federal Reserve, decided to wring inflation out of the economy by sharply raising interest rates. The medicine worked to cure inflation, but it threw the economy into a deep recession. Recovery came when the Federal Reserve lowered interest rates again and sparked an investment boom.
In contrast, the 2008 financial crisis was the result of a credit bubble. It came when the Federal Reserve was already trying to stimulate the economy with low interest rates. It was — and is — global in nature, and for the economy to recover, households need to dig themselves out of debt such that they can begin spending again. Unlike the Federal Reserve lowering interest rates, that takes time. A long time. To attach some numbers to this story, in 1982, household debt amounted to about 45 percent of GDP. In 2009, it was 100 percent. Those numbers imply very different recoveries.
The 1980s were not all about Reagan. The effect Volcker’s policies were having on the economy was well understood. Here’s the New York Times, in 1983: “As the recession deepened in 1982, the United States and the rest of the industrialized world focused on high interest rates as the cause - and on Paul A. Volcker as the culprit.” The House majority leader, Democrat Jim Wright, called for Volcker to resign. Reagan officials were unhappy, too. “A question that seems to be in the minds of many people in the Reagan Administration and the business community is whether the Federal Reserve should pull back a bit from its restrictive monetary policy and let the President’s economic recovery package have its intended stimulative effect on the economy.”
Be very skeptical of any discussion of the recession or recovery of the early-1980s in which Volcker — or at least the Federal Reserve -- is not a primary actor. You’re likely reading a piece that deifies Reagan rather than a piece of actual economic analysis.
The 2000s are not all about Obama. Key decisions about regulating financial derivatives were made under Clinton. The credit bubble built under Bush. The initial response to the financial crisis — which set us on a path that was hard to reverse after-the-fact — was made by Bush’s Treasury Secretary, Hank Paulson, and Federal Reserve Chairman Ben Bernanke. The pace of recovery has been substantially slowed by the European debt crisis and the rise in oil prices that resulted from the Arab Spring.
Contrary to popular belief, taxes are lower under Obama than they were under Reagan. In 1983, when Reagan was trying to get the economy out of recession, revenues were 17.5 percent of GDP. In 2010, when Obama was trying to guide the economy into a recovery, revenues were 14.9 percent of GDP.
Taxes are so low under Obama in large part because of the Bush tax cuts and the effects of the financial crisis. But they’re also low because of the tax cuts passed by Obama in the stimulus bill. And remember — Obama’s number here is for 2010. In 2011, Obama further extended and enlarged the Bush tax cuts in the 2010 tax deal.
Nor are revenues resulting from Obama’s tax policies expected to rise above Reagan’s totals in the near future. In 1988, when Reagan left office, revenues were 18.2 percent of GDP. Under the Congressional Budget Office’s alternative-fiscal scenario -- which is their most realistic projection -- revenues only rise (pdf) to 18.4 percent of GDP by 2021. If Obama manages to pass his most consistent tax-policy demand and sunset the Bush tax cuts for income over $250,000, that would rise by less than half a percentage point. In other words, taxes were never as low under Reagan as they are under Obama, and Obama’s policies would not lead to a significantly different tax burden than Reagan’s policies did.
Obama’s recovery isn’t done. For reasons laid out above, I don’t think you can make an apples-to-apples comparison between Obama and Reagan. But it’s certainly worth keeping the obvious in mind: Obama’s recovery isn’t done. At this point in Reagan’s presidency, unemployment was eight percent — though it was falling quickly. There’s nothing in the economic data right now suggesting that unemployment will fall very quickly over the next year, but a world in which the unemployment rate is 7.5 percent in November will look better for Obama than a world in which unemployment is 8.2 percent — even if the difference was made by policymakers in Brussels.
Which isn’t to say that there aren’t useful comparisons to be made between the policies pursued by Obama and previous presidents. But the comparisons need to focus more tightly on the policies they pursued then the circumstances they faced. For instance:
Obama’s policies have temporarily increased deficits. Reagan’s policies permanently increased them. Reagan’s policies were notable for increasing structural deficits. That is to say, he passed permanent, deficit-financed tax cuts. Long after the recession was over, his tax cuts remained, necessitating the deficit-reduction bills passed by George H.W. Bush and Bill Clinton. Obama’s major deficit-financed policies -- the stimulus and the 2010 tax deal -- have both been temporary. Obama has, in other words, been much more concerned with out-year deficits than Reagan ever was.
When Reagan entered office, taxes were unusually high. When Obama entered office, taxes were unusually low. In 1980, taxes were 19.6 percent of GDP. That was higher than they had ever been outside of wartime. When Obama entered office, taxes were below 15 percent of GDP -- lower than they had been since before the creation of Medicare and Medicaid. This helps explain why Reagan sought a long-term tax cut, while Obama is seeking a long-term tax increase.
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