News and Commentary

Reagan vs. Obama: How Capitalism Solves Economic Problems

Comparing the economic recoveries of Barack Obama and Ronald Reagan, as well as the presidents in between, data shows how the capitalist policies of Reagan’s were far more successful than the socialist policies of Obama and more successful than the less capitalist policies of George H. W Bush and Bill Clinton.

Richard W. Rahn, writing for The Washington Times, points out that the U.S. economy is growing at the slow rate of 1% per year, which makes reducing the debt and creating more jobs more difficult.

The only two deep recessions in the last 35 years occurred in 1981-82 and 2008-09. Reagan handled the earlier recession by eschewing the traditional wisdom based on the “Phillips Curve,” which argued a reverse correlation between inflation and unemployment. Instead, Reagan limited the money supply and cut the marginal tax rate from 70 percent to 28 percent, which yielded a jump in tax revenues as the economy grew and jobs soared. Inflation was cut from 12.5% to 4.4 % by the time Reagan left office.

George H. W. Bush (41) increased tax rates as the economy fell into a mild recession; Clinton raised them again in 1993. Thus the recovery from the mild recession of 1990-91 was slower than Reagan’s rapid recovery. Clinton embraced more capitalistic policies later, as he joined with Congress to cut the capital gains tax rate at the beginning of his second term, and reduced spending as a percentage of GDP, prompting the economy to grow over 4% per year.

George W. Bush dealt with the mild recession of 2001 by a refusal to cut spending and did not immediately implement a small tax rate reduction, leaving the economy ripe for a deeper recession.

Then, Obama, who dealt with the deep recession by implementing his “stimulus program,” raised tax rates and instituted a massive number of regulations. The result: the worst recovery in modern American history.

As Peter Morici noted in January, another factor in Reagan’s success and Obama’s failure was Obama’s philosophy of rewarding those choosing to remain unemployed: “Through the first 25 quarters of Mr. Obama’s recovery, GDP growth has averaged 2.2 percent, whereas during the comparable period for Reagan, GDP advanced at a 4.6 percent annual pace. And whereas Reagan’s social safety net assisted the unemployed, Mr. Obama’s pays the unemployed to be idle.”

The Senate Budget Committee said in a 2014 report that 2 1/2 years after the start of the 1981 recession, employment had fully recovered. Under Obama, total jobs didn’t reach the pre-recession level until July 2014, 6 1/2 years after the recession he inherited started.