One Year Later, Another Look at Obamanomics vs. Reaganomics
On this day last year, I posted two charts that I developed using the Minneapolis Federal Reserve Bank’s interactive website.
Those two charts showed that the current recovery was very weak compared to the boom of the early 1980s.
But perhaps that was an unfair comparison. 
Maybe the Reagan recovery started strong and then hit a wall. Or maybe the Obama recovery was the economic equivalent of a late bloomer.
So let’s look at the same charts, but add an extra year of data. Does it make a difference?
Meh… not so much.
Let’s start with the GDP data. The comparison is striking. Under Reagan’s policies, the economy skyrocketed. Heck, the chart prepared by the Minneapolis Fed doesn’t even go high enough to show how well the economy performed during the 1980s.
Bush Was Not a Conservative
There’s an interesting debate in the blogosphere about whether President George W. Bush was a conservative. Here’s a good summary of the discussion, along with lots of links. (I especially like this analysis since it cites my work.)
I’ve already explained that Bush was a statist rather than a conservative, and you can find additional commentary from me here, here, here, and here.
Simply stated, any president who doubles the burden of federal spending in just eight years is disqualified from being a conservative — unless the term is stripped of any meaning and conservatives no longer care about limited government and constitutional constraints on Washington.
But if you don’t want to read the blog posts I linked above, this chart should make clear that Bush was a big spender, not only when compared to Reagan, but also compared to Clinton. Moreover, we’re only looking at overall domestic spending, so this doesn’t include Iraq, Afghanistan, and other defense expenditures. And these are inflation-adjusted dollars, so we’re comparing apples to apples.
Should America ‘Liberate’ Libya?
In 2008, the election of President Barack Obama was widely touted as a repudiation of President George W. Bush’s messianic vision that “Our common prosperity will be advanced by allowing all humanity—men and women—to reach their full potential.” In the years following America’s failed democratic experiment in Iraq, many Americans began to spurn the Bush era’s presumptuous conviction that “We have the power to make the world we seek.” Liberals in particular roundly rejected the supposed “unyielding belief” that America is called to lead the cause of “rule of law” and “the equal administration of justice” around the world. Such pious declarations are in keeping with Bush’s neo-Wilsonian foreign policy. Does it surprise you then, that all of the quotes above were made by President Obama in his June 2009 speech at Cairo University?
Americans who favor establishing a no-fly zone over Libya hope that such an effort will save lives. What Americans have not learned is exactly what transgressions warrant the use of American force. The primary constitutional function of the U.S. Government is to defend against threats to the national interest. However, because the definition of “interest” has expanded by leaps and bounds, the United States now combats an exhausting proliferation of “threats” even in the absence of discernable enemies. Hence, the proposal of a no-fly zone over Libya is merely the latest iteration of a long-standing grand strategy that implicitly endorses an interventionist foreign policy.
Despite the fact that humanitarian assistance to Libya remains, in principle, morally defensible, the primary question is whether military action is best suited to such a task. As Christopher Coyne, Assistant Professor of Economics at West Virginia University argues, its the “Nirvana Fallacy.”
The Nirvana Fallacy is the false assumption that in the face of weak, failed or illiberal governments, external occupiers can provide a better outcome than what would exist in the absence of those efforts. But what authority does President Obama have to embark upon a mission to change the very structure of societies on the other side of the earth?
As a libertarian, I believe that intangible variables such as values, traditions, and belief systems, go beyond a U.S. policymaker’s ability—and jurisdiction—to control. Yet with worldwide attention now on Libya, it seems that once again the extension of freedom abroad is being subsumed under the mantle of America’s legitimate self-defense. Don’t believe the hype.
Spending Restraint Works: Examples from Around the World
America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.
For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.
But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.
To Fix the Budget, Bring Back Reagan…or Even Clinton
President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.
But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.
Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.
Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.
Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.
Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.
Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending — largely because of rapid increases in domestic spending.
This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.
Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.
Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.
Comparing Reaganomics and Obamanomics
Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).
The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.
The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.
The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.
Well, Bush Got Two Terms
From a New York Times report on NBC’s interview:
Former Vice President Dick Cheney . . . said President Obama is likely to be a one-term president because his policies are unpopular with the public.
“His overall approach to expanding the size of government, expanding the deficit, and giving more and more authority and power to the government over the private sector,” Mr. Cheney said in an interview with Jamie Gangel for NBC News. “Those are all weaknesses, as I look at Barack Obama. And I think he’ll be a one term President.”
I recall the Bush-Cheney administration also came under criticism for “expanding the size of government, expanding the deficit, and giving more and more authority and power to the government,” and it didn’t prevent him from being reelected.
Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?
Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.
We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.
But which nation will be the next domino to fall? Who will get the next direct bailout?
Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.
But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.
The Consumer Spending Fallacy behind Keynesian Economics
I’m understandably fond of my video exposing the flaws of Keynesian stimulus theory, but I think my former intern has an excellent contribution to the debate with this new 5-minute mini-documentary.
The main insight of the mini-documentary is that Gross Domestic Product (GDP) only measures how national output is allocated between consumption, investment, and government. That’s useful information in many ways, but if we want more output, we should focus on Gross Domestic Income (GDI), which measures how national income is earned.
Focusing on GDI hopefully would lead lawmakers to consider ways of boosting employee compensation, corporate profits, small business income, and other components of national income. Focusing on GDP, by contrast, is misguided since any effort to boost consumption generally leads to less investment. This is why Keynesian policies only redistribute national income, but don’t boost overall output.
You may recognize Hiwa. She narrated a very popular video earlier this year on the nightmare of income-tax complexity.
Republicans and Democrats Should Be Especially Concerned about the Threat of Government When Their Party Is in Charge
Gallup just released a poll showing that 46 percent of Americans view the federal government as an immediate threat to the rights and freedoms of ordinary Americans. My first reaction was to wonder why the number was so low. After all, we have a political elite that wants to do everything from control our health care to monitor our financial transactions.
But a secondary set of numbers is even more remarkable. As seen in this chart, both Republicans and Democrats tend to view the federal government as a threat mostly when the White House is controlled by the other party.
This complacency is very unfortunate. Republicans presumably want to limit government control over the economy, yet it was the Bush Administration that put in place policies such as Sarbanes-Oxley, the banana-republic TARP bailout, the corrupt farm bills, and the pork-filled transportation bills. Democrats, meanwhile, presumably want to protect our civil liberties, yet the Obama Administration has left in place virtually all of the Bush policies that the left was upset about just two years ago. There has been no effort to undo the more troublesome provisions of the PATRIOT Act. And shouldn’t honest liberals be upset that the Obama Administration is going to such lengths to defend the military’s don’t-ask-don’t-tell policy?
The lesson to be learned is that there is an unfortunate tendency for politicians to misbehave when they get control of the machinery of government. Lord Acton warned that “Power corrupts and absolute power corrupts absolutely.” It’s almost as if Republicans and Democrats do their best every day to confirm this statement.
When Keynesians Attack, Part II
I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.
Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”
This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.
But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.
Minimum Wage Hikes Deserve Share of Blame for High Unemployment
Even though the Obama Administration claimed that squandering $800 billion on so-called stimulus would keep the joblessness rate below 8 percent, the unemployment rate today is almost 10 percent. There are many reasons for the economy’s tepid performance, including a larger burden of government spending and the dampening effect of future tax rate increases (tax rates will jump significantly on January 1, 2011, when the 2003 tax cuts expire).
A closer look at the unemployment data, though , suggests that minimum wage laws also deserve a big share of the blame. In this Center for Freedom and Prosperity video, a former intern of mine (continuing a great tradition) explains that politicians destroyed jobs when they increased the minimum wage by more than 40 percent over a three-year period.
Mr. Divounguy is correct when he says businesses are not charities and that they only create jobs when they think a worker will generate net revenue. Higher minimum wages, needless to say, are especially destructive for people with poor work skills and limited work experience. This is why young people and minorities tend to suffer most – which is exactly what we see in the government data, with the teenage unemployment rates now at an astounding (and depressing) 26 percent level and blacks suffering from a joblessness rate of more than 15 percent.
In a free society, there should be no minimum wage law. From a philosophical perspective, such requirements interfere with the freedom of contract. In the imperfect world of politics, thought, the best we can hope for is that politicians occasionally do the right thing. Sadly, the recent minimum wage increases that have done so much damage were signed into law by President Bush. It’s worth noting that President Obama’s hands also are dirty on this issue, since he supported the job-killing measure when it passed the Senate in 2007. When the stupid party and the evil party both agree on a certain policy, that’s known as bipartisanship. In the real world, however, it’s called unemployment.
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