“Bushobamanomics” vs Reaganomics

Daniel Mitchell at the Cato Institute contrasts this recession/recovery with the one in 1981.  Reagan was able to create a rebound that lasted years and created real growth, even while fighting high inflation. The current Keynesian treatment has stalled the economy and jobs.  Mitchell uses pretty charts he made to show the difference.

He also compares GW Bush and Obama’s economic activity:

  • Bush increased government spending. Obama has been increasing government spending.
  • Bush adopted Keynesian “stimulus” policies. Obama adopted Keynesian “stimulus” policies.
  • Bush bailed out politically connected companies. Obama has been bailing out politically connected companies.
  • Bush supported the Fed’s easy-money policy. Obama has been supporting the Fed’s easy-money policy.
  • Bush created a new healthcare entitlement. Obama created a new healthcare entitlement.
  • Bush imposed costly new regulations on the financial sector. Obama imposed costly new regulations on the financial sector.

That they are so alike, Mitchell combines their joint 12 year effort:

“The problem isn’t Obamanomics, it’s Bushobamanomics. But since that’s a bit awkward, let’s just call it statism.”

21 thoughts on ““Bushobamanomics” vs Reaganomics

  1. They have a point in likening Bush and Obama policies, but exempting Reagan from the label is disingenuous at best. About the only point that doesn’t apply to him is the easy money policy and that because the situation with inflation in the early 80s was completely different than what Bush and Obama have faced.

  2. I totally agree that Bushobamanomics is statism. Bush was a big spender, and Obama is a really big spender. But the problem is that Reagan was also a big spender. Please look at these charts here:

    http://www.usgovernmentspending.com/debt_deficit_history

    They will show that Reagan increased spending and debt in a way that was unprecedented during peacetime. Now, you can argue, as many people have, that Reagan’s spending was necessary to defeat the Soviet Union. You can also argue, as many people have, that the Reagan prosperity laid the foundation for the 1990s decrease in spending as a percentage of the economy. Both of these arguments are decent points that cannot be discarded. But the bottom line is that Reagan *was* a big spender in the 1980s.

    Romney will be a slightly smaller spender and will chip away at the deficit very slightly. I would predict that after four years of Romney the deficit will go from $1.1 trillion a year now to perhaps $500 billion a year. People will hail that as a huge achievement. But I keep on thinking of all of the debt being left to my kids by our generation. By 2016, that debt will still grow to $18-plus trillion, not to mention the tens of trillions in unfunded liabilities. I continue to say we need to have a completely different approach to this issue: balance the budget in the next 2-3 years. Make large cuts now and then begin paying off the debt slowly over time. That is the only road to long-term prosperity.

  3. I don’t know why the middle class doesn’t get this message! The rich cannot be taxed at a high enough rate to make a significant dent in the total cost of government and the poor obviously can’t pay the bill so a back of the envelope calculation quickly comes to the conclusion that the middle class gets stuck with the tax bill. Why do they vote for bigger government when it is clearly against their best interests?

  4. The national debt hasn’t been paid off since Andrew Jackson’s time. How did all of the generations before us manage to create such prosperity when they were themselves the woeful grandchildren of debt-leavers?

  5. Geoff, it sounds like you are a proponent of going over the fiscal cliff, since without any compromise, the automatic spending cuts will result in a deficit of 641 billion for 2013 and 387 billion for 2014. I would prefer less immediate cuts since such drastic cuts are likely to tip the economy back into recession and have the result of further exacerbating deficits — more important to lower unemployment and raise economic growth. Momentum is going in the right direction for these and doesn’t need to be shocked.

    I’m also inclined to agree with DCL — not important to pay off all debt, just to keep it reasonable as a percentage of GDP, especially when borrowing costs are so low. If the deficit is stabilized and gradually decreased while GDP rises, there will be nothing to worry about. Besides, US debt is an important investing tool. Greenspan famously worried in 2001 that in a few years it would be entirely paid off, and even suspended issuance of the 30-year, until it was revived in 2006.

    “■Bush imposed costly new regulations on the financial sector. Obama imposed costly new regulations on the financial sector.”

    Bush imposed regulations because there was an epidemic of fraud by companies such as Enron, Worldcom, Adelphia, Tyco, etc. Obama imposed regulations because the big banks leveraged themselves 30 to 1 with toxic and fraudulent mortgage securities, and then required taxpayer assistance so as not to destroy the financial system and world economy. You can argue that some details of the regulations were not well-conceived. Hard to argue that regulations weren’t necessary.

  6. DCL, there is such a thing as manageable debt. When a couple making $100K a year borrow $200K over 15-30 years to purchase a house, they are able to manage the interest and financing.
    Geoff, yes Reagan did do some spending. But he noted it was to defeat the USSR and then would come the “peace dividend” which Bill Clinton enjoyed in his presidency, allowing him to balance the budget. As it is, his deficits were miniscule compared to trillion dollar annual deficits.

    Lemming, it is not disingenuous. The only reason we do not have high interest rates right now is because the Fed is keeping it artificially low. We see the rising rates in other ways: gasoline prices, food prices, etc. The Carter recession was a major one, but Reagan was able to fix it and rebound the economy quickly. Most recessions have quickly rebounded, except when government has stepped in with big regulation, taxes, and intervention, squashing private enterprise (such as happened during the Great Depression). As it happens, Hoover and FDR both spent money to fix the Great Depression. Hoover’s actions made it bigger, while FDR’s tax hikes in 1935-6 extended it. Reagan’s actions of lower taxes, lower Fed rate, and concepts to stimulate small business growth made a difference. Bush and Obama have vastly increased the size of government, vastly increased our debt, and increased regulations that have harmed businesses, etc.

    If Pres Obama is re-elected and continues with his statist policies, we will have a lost decade, just as Japan did in the 1990s. Even if Romney is milquetoast in lowering deficits to only $500 billion a year, it will stimulate the economy sufficiently to create millions of jobs, remove many people off of the welfare rolls, and in growing the economy will allow us to eventually get back to balanced budgets.

  7. Bill, that Marketwatch article has been bunked and debunked 100 times since it came out in May. It really is the rankest piece of partisan garbage published in a business magazine in a long time. Every neutral observer recognizes that Obama has ushered in bigger government. The best visualization is here:

    http://pjmedia.com/instapundit/wp-content/uploads/2012/10/OBAMAFAILDEFICITSCBO.jpg

    As for decreasing the deficit to a lower percentage of GDP, this is perhaps the best thing we can can hope for. The deficit is about 103 percent of GDP today — if we were to get the overall deficit below 50 percent of GDP or so it would probably be less of a problem. Note that with all of the unfunded liabilities this means massive reform of Social Security and Medicare, as well as cutting nondiscretionary spending and Defense. It also supposes that interest rates will never spike up again. None of that is likely, so we are heading for a cliff either way. But if you want me to agree that we don’t need to entirely pay off the debt but instead accept a lower-debt-to-GDP ratio, OK, fine. Looking at the future 10 or 20 years from now, and factoring in higher interest payments, higher Medicare and Social Security payments (and a constantly growing military), when exactly will that happen?

    (I recognize it may happen temporarily in the next few years — I am talking about projections 10-20 years from now).

  8. Geoff, if you have a link to a good rebuttal of Bill’s article I’d love to see it. Glenn Reynolds’ graph is great, but it doesn’t seem to address how much of the annual deficits were caused by increased spending versus declining revenue.

  9. Rame,

    While you make some good contrasts, your post omits a huge contributing factor to why the policies in place under Regan caused growth. That factor is Paul Volcker. When Volcker took the reigns of the Fed in 1979, he was known to have said “I am going to kill inflation.” (This is not a direct quote, but a paraphrasing of what I was told in Macro classes). Volcker’s actions sacrificed the unemployment rate on the alter of inflation reduction by raising interest rates in a time of Carter’s stagflation. As such, he essentially hit the reset button on the economy so that future monetary policy would have significant meaning. In econo-speak, this is getting the economy back to a manageable position on the Phillips Curve.

    Right now, the economy is in a similar situation as we found in the late 70′s, though not quite as bad. We have a Fed Chairman who doesn’t have the gumption to raise rates. As such, capital continues to be poorly allocated, stifling growth.

    While I am not a huge fan of the Fed to begin with, I at least respect Volcker’s willingness to grow a pair and pull the necessary trigger to reset the economy to a point that was manageable again, at least from a monetary policy standpoint.

  10. Your point on Volcker is only half the story. When Reagan came into office, he ordered Volcker to reduce inflation to a manageable level, which Volcker did. This, reducing tax rates, and reducing regulation all worked to create the Reagan expansion that basically lasted until 2008.

    I agree that one of our problems today is that interest rates are artificially low, and need to be raised, perhaps to 4-5%. This will stimulate growth for those saving money, encourage savings which will put more real money into the banks for loans, etc. Instead, with 0% interest rates we see that the banks have little money to risk, and so it is hard to find a loan. So the Fed is printing extra money to give to the banks to make up for this artificial economy. This creates a great bottom line for banks and Wall Street, but raises costs in the store and gas pump.
    Gas prices then affect many businesses, so they raise prices or fire people to make ends meet. They cannot expand, because they cannot borrow to do so, and the risks of expanding are too great. It becomes a vicious circle.

  11. Rame, if rates were raised to 4-5 percent the deficit would increase by many hundreds of billions because we would have to pay more in interest on government bonds. The Fed and our bloated federal government have created a real mess.

  12. …which is why so many conservatives branded Bush a socialist pinko while he was expanding Medicare. And has anyone seen Romney’s defense budget proposal? Oh, right, that’s all going to be paid for with “deductions”. If you like a balanced budget, don’t vote for either of these guys. Unless of course the congress goes Dem under Obama(not likely) – then the Bush tax cuts can expire and we can get back to a Clinton-style surplus.

  13. That AEI article doesn’t really debunk any of the data in the Marketwatch article, it just refuses to accept the premise that Obama was largely not responsible for the fiscal year 2009 budget. There wasn’t any really appreciable increase in spending in the years 2010-2012, just a continuation of the new levels, accompanied, as JimD notes, by a continuation of the huge decline in revenue, thanks to tax cuts and lower GDP.

  14. Too right Rame. Goes to show that Regan’s policies would have floundered had not Volcker been there to clearly signal a credible course of monetary action, which required two years of real pain until things got better. Of course, today, I don’t think that is even an option, both practically and politically.

  15. Bill, the entire point of the Marketwatch article is to claim that Obama is not a big spender. That argument might actually fly if you counted the 2009 budget as the Bush budget and then saw Obama *decrease* spending. So, in round numbers, what we saw was: 2008: $2.7trillion, 2009: $3.6 triillion. If we say that the $3.6 trillion was temporary because of the stimulus, we should have seen 2010 go down to $2.8 trillion again. But of course that is not what happened. Obama adopted $3.6 trillion as the new baseline. So it is extremely misleading to claim that Obama only increased spending from $3.6 trillion to $3.7 trillion and is therefore a fiscal conservative. In fact, he adopted the new high spending levels as his own.

    Let’s say somebody makes $50k a year and usually spends all of that. Let’s say one year that person and has a one-time home repair of $20k and spends $70k total, taking the $20k out of savings. You cannot claim the person is fiscally conservative and not a big spender if that person spends the next three years “only” spending $71k while still only taking in $50k. The spending did not increase from $70k to $71k. It increased from $50k to $71k.

    For Obama, the spending did not increase from $3.6 trillion to $3.7 trillion (which is what the Marketwatch article claims). The increase was from $2.7 trillion to $3.7 trillion, making the claim that Obama is not a big spender completely fallacious.

  16. If our monetary system was anything like a household budget, you guys might actually have a point! In fact, the household budget model predicts the opposite of reality on the two points that count – the current low inflation and negative real interest rates for federal borrowing. The household budget analogy exists as a political device to get unsophisticated folks into a debt hysteria to serve certain narrow political ends. It is a mistake to think it is an actual description of the monetary system.

  17. DCL, actually no. Real inflation is actually quite high compared to where it should be in a bubble economy. It is near 3 percent in a faulty statistical environment where the way of measuring inflation has changed since the 1980s. People are very aware that the stuff they buy — gasoline, bread, milk, etc — is much more expensive than it was 5 years ago. In a real economy, prices would be falling significantly to match the weakness of the economy. There are two macro events that are keeping us from hyperinflation given that the money supply has doubled in the last five years: 1)the crisis in Europe, which means the dollar is stronger than it would be compared to its major rival, the Euro and 2)the fact that banks are keeping the money from the Fed and turning it over into government bonds rather than letting it leak into the economy. At some point, both 1 and 2 will change, and the excrement will hit the ventilation device.

    Real economics involves real-world examples. The family budget is not perfect but it does serve to help us understand realities. As a country, we are exactly like the family that is living on 10 credit cards with $300k of debt when we only make $50k per year. The bank is continuing to give us credit cards for some bizarre reason, but the truth is that there are only two ways out: 1)cut spending and start paying off the credit cards or 2)declare bankruptcy (meaning default on our debt). I am hoping we find a way to do number 1 because number 2 will be very, very ugly.

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