Dr. Arthur Laffer was an economic advisor to President Reagan and played a key role in developing the economic policies during the Reagan years that took us from “stagflation” to one of the longest running economic booms in history. Dr. Laffer has given me permission to post his most recent paper on my website. It compares the Reagan economic policies to the policies being followed today. Whether or not you share Dr. Laffer’s views, his paper is thought provoking and should be read.
THE ODD COUPLE
President Obama and President Reagan Couldn’t be More Different
Recently a number of well placed political pundits have noted striking similarities between the presidencies of Ronald Reagan at this juncture in his tenure in office and Barrack Obama. They point out that both presidents had sharp declines in their popularity, both oversaw terrible declines in the economy, both had huge budget deficits, and both had large off-year political losses in Congress. As a consequence of these striking similarities, these pundits extrapolate a landslide Obama victory in 2012. I hate to tell you, but it just ain’t so.
Two Presidents and their Politics
President Obama’s most recent approval ratings (August 2011) have fallen below President Reagan’s equivalent approval ratings for the first time since November of 2009. Both President Obama and President Reagan suffered enormous declines in their respective approval ratings after starting their terms in office with numbers in the stratosphere (see Figure 1).
The critical difference between Reagan’s approval ratings at this juncture and Obama’s approval ratings is that Reagan’s approval ratings troughed in January 1983 and soared thereafter. Rarely in history has anything like the surge in Reagan’s approval occurred. At present President Obama’s approval ratings continue to fall a full seven months after Reagan’s approval started its surge.
Shortly after entering office both President Reagan and President Obama became enmeshed in an economy in freefall (see Figures 2 & 3). For President Reagan the unemployment rate was well into the 10% to 11% range, while for President Obama the unemployment rate barely grazed the 10% level. But that’s not the whole story. In fact, the slightly worse performance by Reagan’s administration in terms of the unemployment rate is misleading. As shown in the charts below (Figures 2 & 3) President Obama’s equivalent economic performance is far worse than Reagan’s performance whether one looks at employment or real GDP.
Both President Obama and President Reagan had large budget deficits in their first several years in office. But here again the seeming similarities are deceiving. As a percent of GDP the deficits Reagan had were half as large of those Obama is currently experiencing (see Figure 4). Not only are Reagan’s deficits half as large as Obama’s, the net national debt under Reagan – again as a percent of GDP – was far smaller than is the net national debt under President Obama (see Figure 5).
By the time of the mid-term elections in 1982 the Republicans suffered sizable losses in the U.S. House. Already trailing the Democrats 192 to 242, the Republicans lost 26 House seats net reducing them to a small minority of 166 to the Democrats 269. The Senate remained pretty much unchanged after the 1982 election. Republicans went from 53 to 54 seats while the Democrats stayed at 46 seats (the Republicans won one seat previously held by an independent).
In the elections of 2010 President Obama’s party – the Democrats – suffered far greater losses than Reagan’s party – the Republicans – suffered in 1982. In 2010 the Democrats lost control of the House after losing an unbelievable 63 seats net. The Democrats went from 256 seats in 2008 to 193 seats in 2010 while the Republicans went from 179 seats in 2008 to 242 seats in 2010.
It’s hard to overestimate the significance of this legislative defeat for the Democrats. After the 2008 election the Republicans had only 40 Senate seats and now have 47 seats. The governorships and state legislatures also turned strongly to the Republicans in 2010. All in all the reversal of political fortunes from 2008 to 2010 is unprecedented and comparable to nothing in modern times.
In simple terms the off-year losses for Reagan were far less than were the off-year losses for Obama. The type of defea experienced by the Obama Democrats in 2010 is for them a harbinger of far worse things to come. They have done nothing to accommodate their political debacle. At its most recent reading, Intrade has lowered the betting odds for Obama to be reelected President to a smidgeon above 50%, whereas as recently as May his odds of being reelected were above 60% (see Figure 6).
The perceived similarities between Reagan and Obama in approval ratings, midyear election setbacks, budget deficits and economic decline have prompted a number of pundits to remark on the similarities of the two presidencies. In fact, it’s the political turnaround that Reagan experienced in November of 1984 that keeps the Democratic hopes alive for President Obama in November of 2012. Yet, in my view the Democrats are grasping at straws. The two Presidents have virtually nothing of substance in common. This paper compares and contrasts the two Presidents.
It is in my view as of today (August 2011) that the Republicans will take a clean sweep in 2012.
On August 21st, 1981, President Reagan’s signature Economic Recovery Tax Act of 1981 – named after its two bipartisan co-sponsors Kent Hance (D, TX) and Barber Conable (R, NY) – passed in the Senate with 37 of the 46 Democratic senators voting with President Reagan to cut tax rates. The final vote in the Senate was 89 to 11. On December 24th 2009, President Obama’s Patient Protection and Affordable Care Act passed the Senate without a single Republican vote after having passed in the House with Anh “Joseph” Cao (R, LA) as the only Republican to vote in favor.1 The Democrats also passed the so-called Dodd-Frank bill without Republican support. The Democrats blocked the House passed Ryan budget and the House passed “Cut, Cap and Balance” legislation. Not a single Democrat in the Senate supported either of those bills. Now there’s bipartisanship for you.
During the Reagan years the debt ceiling was raised 17 times without a tax rate increase – EVER. Whoops, I guess this is an instance where we actually do have a similarity between President Reagan and President Obama because Obama’s debt ceiling increase also was passed without a tax rate increase. The only difference is that President Obama wanted a tax rate increase and President Reagan didn’t. Well, well, well!
To highlight the differences between President Reagan and President Obama on the debt ceiling debate, it is true that President Reagan did agree to revenue increases a number of times (as opposed to tax rate increases) in order to get the debt ceiling raised. But President Reagan did not agree to those conditions graciously.
For example on September 22, 1987 when Congress was acting like donkeys, President Reagan stated, “They have loaded that simple bill [the Debt Ceiling increase] with a cut in Defense so great we’d have to kick 400,000 out of service. I’d have to agree to bil[lion]’s of $ in new taxes & on & on. Jim Baker says if I veto we could conceivably have a world crisis financially because we’d be defaulting on $24 Bil. worth of bonds. I have to come up with a decision on–do I sign or do I veto. Everything in me cries out to veto.”2
But in the end President Reagan did sign the bill on September 24th with the following statement: “I have decided to sign the debt extension bill but with a hard statement to the effect that it’s probably the worst legislation ever sent to me. But I must sign to keep us from defaulting on $24 Billion worth of Bonds.”3
The need to increase the debt ceiling in the first few years of both the Reagan and Obama presidencies was in part due to a precipitous collapse in the U.S. economy (see Figure 7) and a corresponding collapse in tax revenues. During the Obama tenure for sure, and to a lesser extent in the early Reagan years, the sharp increase in debt was also a consequence of spending increases (see Figure 8).4
It is my contention that the collapse in the economy for President Obama was also a direct consequence of excessive spending, but for President Reagan it was due to a deferral in tax cuts. While the collapse in the economy in both Reagan’s and Obama’s early years is a striking similarity between the two presidencies, the causes for those collapses are at opposite poles of the economic spectrum and as a consequence the prognosis for what is to come for President Obama couldn’t be more different.
Now it’s true that during both Presidents’ first two years in office the economy tanked (see Figure 7) – but for very different reasons. President Reagan phased in his income tax cuts, which incentivized people to postpone earning taxable income.5 President Obama on the other hand earned his recession the old fashioned way – by following President George W. Bush’s lead and spending massively in his first two and one half years in office (see Figure 8). Neither “W” nor Obama quite understood that government spending is taxation.6 At the end of their respective first two years in office, President Reagan’s tax cuts became a reality while President Obama’s spending continued unabated. And herein lies the rub.
Creating economic growth and lots of jobs really isn’t rocket surgery. Firms exist to provide returns to their investors by earning profits: A firm bases its decision to hire a worker on gross wages that have to be paid for that worker i.e. the total cost to the firm for hiring that worker, including all payroll and income taxes, Medicare and Medicaid taxes, workers compensation costs, expansion of the firm’s parking lot, insurance costs, and everything else. The higher gross wages paid are, the less workers the firm will hire and vice versa. The demand for workers is downward sloping with respect to gross wages paid.
In the words of Clark Gable, workers “couldn’t give a damn” how much it costs a firm to hire them. They care about net wages received or how much they can get net of all taxes – property, sales, payroll, tariffs, death, income, capital gains etc.
– for giving up eight hours a day. The higher net wages received are, the more workers will work; the lower net wages
received are, the less workers will work. It’s that simple. The supply of work effort is upward sloping with respect to net wages received.
The difference between what it costs a firm to hire a worker and what that worker receives net is called the tax/expenditure wedge. Reducing that tax/expenditure wedge – whether the government cuts tax rates, reduces spending, loosens regulations or frees trade – will simultaneously reduce gross wages paid and increase net wages received, thereby expanding the demand for labor and the supply of labor. Output, employment and production are stimulated by shrinking the tax/expenditure wedge.7 Es gibt nichts mehr.
President Reagan adhered to every word I just wrote, and President Obama thinks it’s hooey. Vive la différence.
The different perspectives of President Reagan and President Obama on economic growth and employment are nowhere more clear than in their attitudes toward debt.
To President Reagan the U.S. government’s ability to borrow represented an incredible treasure for the American people and should only be used sparingly to create prosperity in times of need. He also believed equally strongly that increasing the national debt to fund unearned consumption or, worse yet, to pay people and businesses not to work was wrong. A number of his funniest one liners in speeches compared Congress to drunken sailors, Tip O’Neil to the deficit and the budget process to feeding a baby. A mean man President Reagan wasn’t, but he was funny as well as being principled.
President Reagan was not against government deficit spending (borrowing) per se. In practical terms Reagan believed that if the American people can borrow at 5% and then invest that money with a 10% return of prosperity for the country via tax reform, infrastructure development and peace through strength, that the country should borrow what’s needed. If, on the other hand, the country can borrow at 5% for only a 2% or lower return it should not borrow anything. Growth countries like growth companies should only borrow for creating growth. Spending on programs that create the very poverty and despair they were meant to alleviate was anathema to him.
President Obama and his predecessor President Bush have shown themselves to be presidents who approve of borrowing for consumption, for payments to bail out losing enterprises, for compensation to people for not working, and for waging wars in countries which present no threat to the U.S. and where we can’t even pronounce the names of the country’s cities. Reagan would have been revolted by what our government has done in the past 4+ years.
Six months into the second half of his first term in office, Reagan’s policies revitalized the economy and produced an average annual increase in employment of 2.3% (3+ million jobs a year at 2010 levels of employment) while Obama’s recession has dragged on, producing only an average annual increase in employment of 1.0% (about 1 million jobs a year, see Figure 9). Alternatively, Reagan’s first two quarters of 1983 saw real GDP growth of 5.1% and 9.3% p.a. respectively. For the corresponding two quarters of 2011 President Obama has only generated real GDP growth of 0.4% and 1.3% p.a. What a difference a day makes (see Figure 7). And then President Obama and his allies argue that if only they could have gotten tax increases on the rich, the country could have taxed itself into prosperity. NOT!
To achieve the types of growth rates needed to reduce American unemployment rates and for America to become the country it could be, we need five economic policies – i.) a low rate flat tax, ii.) spending restraint, iii.) sound money, iv.) free trade and v.) regulatory restraint.
- If the U.S. abolished all federal taxes save “sin” taxes we could replace 100% of the lost revenues with a tax on business net sales and on personal unadjusted gross income8 at less than 12% without a Laffer Curve effect (i.e. static revenue neutrality). Can you imagine what would happen to output? Most people wouldn’t even have to file a tax return.
- When it comes to spending, we face a classic “agency problem.” The politicians who make the government spending decisions aren’t held liable for paying for that spending. As a consequence, those politicians way overspend. It’s like me being at an “all you can eat” restaurant. I would need an eating restraint. Spending restraint is the only answer.
- The key to sound money is to make sure the U.S. dollar retains its value over time to facilitate contracts, investments and to act as a numerair. To maintain the value of the dollar, the supply of dollars must be strictly limited.
- Free trade is also essential to economic prosperity. There are some things the U.S. does better than foreigners, and there are other things foreigners do better than the U.S. We, and they, are foolish in the extreme when we don’t supply foreigners with those things we make better than they do in exchange for those things foreigners make better than we do. It’s a win/win situation. And lastly,
- The U.S. needs regulatory reform. No one disputes the need for regulations, but those regulations need to be targeted to the purposes at hand and they should not extend beyond those purposes, thereby creating collateral damage to the overall economy.
Under President Reagan’s leadership the economy flourished. President Obama has done none of the above five economic policies.
As you can easily see from Figure 7, the economy’s growth rate under President Reagan continued unabated at very high levels for the remainder of his first term in office. The question at hand is how President Obama turns this economy around. It’s getting late in the day and so far there has been no sign of any type of epiphany for President Obama and his team (August 2011). Do the words Jimmy Carter come to mind?
When President Reagan took office on January 20th 1981, the price of a barrel of oil stood at $31 and by mid 1983 was $23, on its way down to $7 in 1986 (see Figure 10). And this tremendous decline in oil prices under Reagan’s watch all happened as the U.S. economy was booming and oil demand was surging. During Obama’s 2 1/2 years in office the price of oil went from $36 to $93 in 2005 inflation adjusted dollars and on its way up to God only knows what. But the differences weren’t just a matter of luck as politicians would have you believe.
President Obama, by opposing off-shore drilling and adding regulatory and tax burdens on coal and oil companies, has done all he could to restrict the supplies of American oil just as his spiritual antecedent Jimmy Carter had done. One of President Obama’s first legislative proposals was “Cap and Trade”, which would have imposed a $650 billion annual tax on energy and would have required emission standards 14% below the 2005 levels by 2020. How’s that for being pro-growth?
President Reagan did just the opposite—he decontrolled oil. President Reagan removed President Carter’s well-head price controls, ended the excess profits tax on oil companies and terminated retail gasoline price controls at the pump. And voila, with markets freed, gas prices tumbled, and the gas lines at the pump vanished. The only reason I’d ever bet that gasoline prices would fall from here on out under President Obama is if the economy collapses faster than oil production collapses (August, 2011).
Interest Rates and the Federal Reserve
And interest rates? When Reagan took office the prime interest rate in this wonderful country of ours was 21 1/2 %. Yes, that’s right 21 1/2%. By mid-1983 it was 10 1/2%. For the next 5 1/2 years of the Reagan Presidency the prime interest rate fell to 8 1/2% thanks in large part to Fed Chairman Paul Volcker. For President Obama the prime interest rate was 3.25% when he took office and is currently 3.25%. But with Ben Bernanke at the helm of the Fed and Tim Geithner at the Treasury, I’m putting my money on a lot higher interest rates for President Obama’s “first” term, let alone a second term, if he gets one.
But perhaps most interesting of all is the story of inflation. When Ronald Reagan first moved into the White House, consumer price inflation was 11.8%, and by mid-1983 it was down to 2.4%. For President Barrack Obama inflation is moving the other way (see Figure 11). Early on in President Obama’s term, the year-over-year change in the consumer price index was negative, reaching -2.1% in July of 2009. As of today consumer price inflation is both positive and rising, hitting 3.6% last month (July 2011).
From an economic perspective there are lots of black swans circling the U.S. but my greatest fear centers on inflation and the Federal Reserve.
Without descending too much into the weeds, the way the Fed is supposed to control inflation is as follows:
- Inflation, as the old phrase goes, is too much money chasing too few goods. Money growth less real income growth is the key inflation determinant. According to Ben Bernanke in his 2003 textbook Principles of Macroeconomics9:From a Macroeconomic perspective, a major reason that the control of the supply of money is important is that, in the long run, the amount of money circulating in an economy and the general level of prices are closely linked. Indeed, it is virtually unheard of for a country to experience high, sustained inflation without a comparably rapid growth in the amount of money held by its citizens. The economist Milton Friedman summarized the inflation-money relationship by saying, ‘inflation is always and everywhere a monetary phenomenon’… Over a longer period, and particularly for more severe inflations, Friedman’s dictum is certainly correct: The rate of inflation and the rate of growth of the money supply are closely related.The existence of a close link between money supply and prices should make intuitive sense. Imagine a situation in which the available supply of goods and services is approximately fixed. Then the more cash (say, dollars) that people hold, the more they will be able to bid up the prices of the fixed supply of goods and services. Thus a large money supply relative to the supply of goods and services (too much money chasing too few goods) tends to result in high prices. Likewise, a rapidly growing supply of money will lead to quickly rising prices—that is inflation.
- Now, in fact, the Fed does not control money growth directly but does so indirectly by controlling the monetary base in a fractional reserve banking system. The level of bank reserves and reserve requirements ultimately determine money growth. Again to quote directly from Ben Bernanke’s textbook:The Fed’s primary responsibility is making monetary policy, which involves decisions about the appropriate size of the nation’s money supply. [C]entral banks in general, and the Fed in particular, do not control the money supply directly. However, they can control the money supply indirectly by changing the supply of reserves held by commercial banks.
- The Fed also does not directly control bank reserves. What the Fed does control is the monetary base, which is comprised of bank reserves and currency in circulation. The logic postulates that the control of the monetary base will, over reasonable horizons, also control bank reserves.
- The Fed does control both the level of the monetary base and reserve requirements.
- As a consequence, monetary base growth and reserve requirements, both of which are controlled by the Fed, indirectly control bank reserve growth, which in turn ultimately determines money growth, which in conjunction with real income growth determines inflation. Referring once again back to Ben Bernanke’s textbook:The Fed has several ways of affecting the supply of bank reserves. By far the most important of these are open market operations. Suppose that the Fed wants to increase bank reserves, with the ultimate goal of increasing bank deposits and the money supply. To accomplish this the Fed buys financial assets, usually government bonds, from the public. To simplify the actual procedure a bit, think of the Fed as paying for the bonds it acquires with newly printed money. Assuming that the public is already holding all the currency that it wants, they will deposit the cash they receive as payment for their bonds in commercial banks. Thus, the reserves of the commercial banking system will increase by an amount equal to the value of the bonds purchased by the Fed. The increase in bank reserves will lead in turn, through the process of lending and redeposit of funds described in the previous section, to an expansion of bank deposits and the money supply…. The Fed’s purchase of government bonds from the public, with the result that bank reserves and the money supply are increased, is called an open-market purchase.
This is the Inflation story.
Fed Chairman Ben Bernanke initiated Quantitative Easing (QE1, QE2 and now QE3) – in layman’s terms he has monetized the debt. He and his fellow Federal Open Market Committee (FOMC) board members have flooded the world with dollars. From July 2007 to the present (July 2011) the Federal Reserve has increased the monetary base of the U.S. (bank reserves plus currency-in-circulation) by 217%. Bank reserves alone have increased 3,910% over the same time period. As a consequence, the M1 money supply has grown by 47%.
Monetary Policy and the U.S. Dollar
Perhaps the piece de resistance of an ill-conceived monetary policy is that the U.S. dollar under President Obama is in free fall (see Figure 12).
From January 2009 to the present (August 1st, 2011) the dollar is down 7.6% against the euro, 14.3% against the Yen and 15.4% against a basket of global currencies. The dollar is also down 47% against gold (see Figure 13).
From the standpoint of Reagan and Volcker, the Obama/Bernanke picture is a 180 degree rotation. Paul Volcker as Chairman of the Federal Reserve Board (appointed first by President Carter and presently a close personal adviser to President Obama) tightened monetary policy and assured a strong dollar. From mid-1978 to early 1985, the inflation adjusted dollar more than doubled in value (see Figure 12). To President Reagan and Fed Chairman Paul Volcker a strong country meant a strong currency. President Obama and his Fed Chairman Ben Bernanke most respectfully disagree. They believe that the U.S. can be devalued into prosperity. Who do you think is right?
If, in fact, we were to remove housing from the CPI, the picture looks a lot worse for President Obama and better for President Reagan. And this shouldn’t come as a surprise to anyone given the abysmal performance of the housing industry here in the U.S. By the beginning of President Reagan’s third year in office, housing was already on the rebound (see Figure 14).
During Reagan’s presidency the housing component of Gross Domestic Product started out at roughly 4.3% of GDP and then fell to 3.3% of GDP during his second year in office. That’s a huge drop. For President Obama, the housing component of GDP started low at 2.7% of GDP and continued to fall right on to the present (July 2011) to about 2.3% of GDP.
But the difference between President Obama and President Reagan was that the housing component of GDP under President Reagan surged in the latter part of his second year in office and by the mid-point of his third year in office was back to where it had started: 4.3% of GDP. The difference between President Reagan’s success and President Obama’s failure is due solely to their policy differences.
President Obama, when confronted with a housing problem, attacked the banks for trying to foreclose on homeowners who were way behind on their payments. President Obama initiated an $8,000 first time homebuyers tax credit to stimulate housing sales. And all that happened was that people changed the timing of their home purchases. At great taxpayer expense President Obama also subsidized banks which were undercapitalized instead of letting them fail immediately as should have happened. In sum, President Obama subsidized over-leveraged homeowners and undercapitalized banks and thereby perpetuated the housing crisis that exists today.11
President Reagan did none of this. President Reagan understood that losses are an essential component of a profit and loss system. Without losses there are no profits, and the economy falters. This process was formally described and made famous by the Austrian Economist Joseph Schumpeter and is called “creative destruction.”
In an earlier incarnation Ronald Reagan had been an active member of the Screen Actors Guild (SAG) which was the actors’ union for the movie industry. Not only was he a member of this union, he had also served as its president. As president of SAG Ronald Reagan called the first industry-wide strike. Ronald Reagan was a union man through and through.
When he became President of the United States, however, Ronald Reagan terminated all of the Air Traffic Controllers for failing to return to work after their strike was deemed illegal12. It’s interesting to note that the Air Traffic Controllers were one of the few unions that had supported Reagan’s candidacy against Carter in 1980. During Reagan’s presidency union membership in the private sector crashed.
President Reagan treated his friends the same way he treated everyone else—impartially. He invariably did what he believed was best for America and the world. This is not to say that he didn’t make mistakes. He did. But he never knowingly erred to help a friend. Can President Obama make that same claim? I don’t think so. President Obama is hardly a Ronald Reagan.
President Obama has supported virtually every pro-union policy he could find. He proposed the Employee Free Choice Act (sometimes called “card check”), which would have denied workers the right to a secret ballot, if he only could have gotten Congress to pass it. President Obama supported the National Labor Relations Board’s (NLRB) decision to prohibit Boeing from opening a plant in South Carolina because South Carolina is a Right-to-Work state. President Obama successfully inserted “prevailing wage” provisions in his stimulus bill as well as “U.S. content” provisions for most of the spending.
President Obama’s pandering to unions never stops. President Reagan would have vehemently disapproved of President Obama’s actions when it came to unions, “card check”, “prevailing wage” and “U.S. content.”
President Obama’s and President Reagan’s views on the minimum wage also were at opposite ends of the spectrum. Obama as Senator voted to raise the minimum wage by $2 per hour. President Reagan on the other hand didn’t allow the minimum wage to be raised one penny throughout his entire eight years as President. In fact, the minimum wage, when viewed correctly relative to the nation’s average wage, fell from about 45% of the average wage in 1980 to about 35% of the average wage in early 1989. Reagan believed that reducing the minimum wage would create jobs for those people who needed jobs the most.
If you listen to some politicians you almost get the sense that when the government raises the minimum wage the lowest paid members of the labor force actually get paid more with no cost to the taxpayer. Just read how then governor Arnold Schwarzenegger made this point back in 2006: “…so it is now time for those who often work the hardest and earn the least to benefit from California’s growth. Let us increase the minimum wage by one dollar an hour, with half starting this year.”13 To most economists, however, an increase in the minimum wage prices the lowest skilled members of the labor force out of a job.
The way I like to explain the consequences of raising the minimum wage is to imagine an increase in the minimum wage to an unreasonably high rate, say, $100 per hour. Few people would be worth hiring and unemployment would soar.
Since the last increase in the minimum wage, the lowest skilled workers – the young, the least educated, minorities and the dis-enfranchised – have experienced a huge increase in their rates of unemployment and a decrease in their participation in the labor force. More to the point, employment as a share of the relevant population of these groups would be expected to fall. And it did (see Figure 15). So who really is better for the poor, the minorities, or the disenfranchised – Reagan with jobs or Obama with social spending?
As of today (August 2011) teenage employment as a percentage of the teenage population is at its lowest level ever. Not only is it at its lowest level, since 1999 it has fallen from 45% of the teenage population to 25% of the teenage population. I would wager a guess that this probably isn’t due to an enormous increase in graduate school enrollments. More to the point, teenage unemployment rates are at all-time highs and teenagers discouraged from entering the labor force are also at an alltime high.
During Reagan’s prosperity teenage employment rose to above 45%. And who says miracles can’t happen?
For the less educated segment of the American population, the same general story applies as it did for teenagers (see Figure 16). Since early 2007 the percentage of the population 25 years old or older with less than a high school education who actually have jobs has crashed going from about 92% to a terrifying 85%. This is no way to achieve social justice or to provide compassion. To paraphrase President John F. Kennedy, the best form of welfare is still a good high paying job.
Perhaps most disturbing of all given the obsequious rhetoric and skewed voting patterns of Americans is the tragedy that has befallen African Americans. Since 1999 African American employment as a share of the African American population has tumbled from 61% to 51% (see Figure 17). While to many politicians this drop in employment seems to be just a number, the millions of damaged families and individuals that lie behind these numbers represent a calamity rarely exceeded in the history of mankind. Man’s inhumanity to man is cloaked in the omnipresent overpowering spin machine spewing its untruths.
During the Reagan presidency the U.S. increasingly projected power onto the world stage. U.S. military might garnered ever greater respect without having to be used. In fact, the only military action the U.S. engaged in during President Reagan’s tenure was in a tiny island in the Caribbean named Grenada. The Cuban Communists tried to muscle their way into Grenada and at the Grenadian Prime Minister’s request the U.S. booted the Cubans out. To Reagan the old Kennedy line held sway – the best form of defense spending is always wasted. Whenever you find yourself in a situation where you have to use your military hardware and prowess it’s a clear sign you did not spend enough. In other words, putting locks on your doors is not wasted money.
President Obama inherited two wars which he said he would end and hasn’t. He now finds himself in a third engagement in Libya with lots of others on the cusp. Defense spending is down, the need to project power is up, and the U.S. presence in the world scene is declining.
You cannot have prosperity in an economy when the government is overspending, raising tax rates, printing too much money, restricting trade, and overregulating. Any comparison between the 1st term of President Reagan and President Obama must start and end with the fact that President Obama is doing all of those things, while President Reagan did the reverse. The economy and stock market under President Reagan took off like a rocket ship while they languish under President Obama. The results of the 2012 election will thus be opposite the 1984 election as well, with the Republicans taking the White house, Senate and House.
Once the market begins to anticipate pro-growth policy, expect equity markets and the U.S. Dollar to rally. Until that time, equity markets will be rocky and we’ll see more of the same from the Federal Reserve.
©2011 Laffer Associates. All rights reserved. No portion of this report may be reproduced in any form without prior consent. The information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its correctness. Opinions are presented without guarantee.
1 Joseph Cao replaced William Jefferson, who was the Democratic congressman who resigned after he was accused of accepting bribes. The district is solidly Democratic and Cao was a one-termer.
2 Ronald Reagan edited by Douglas Brinkley, The Reagan Diaries, Harper Collins, 2007. p. 532, September 22, 1987.
3 Ronald Reagan edited by Douglas Brinkley, The Reagan Diaries, Harper Collins, 2007. p. 533, September 24, 1987.
4 Arthur B. Laffer, “Cracking the Debt Ceiling”, Laffer Associates, January 12, 2011.
5 “No Shrinking Supply-Sider: Economist Arthur Laffer Keeps the Faith”, Barron’s, December 21, 1981.
6 Arthur B. Laffer, “A Conversation with the Administration”, Laffer Associates, February 14, 2011 and also Arthur B. Laffer, “Conference Call
Summary: The U.S. Fiscal and Monetary Dilemma”, Laffer Associates, June 9, 2011.
7 Arthur B. Laffer Ph.D., Ford Scudder CFA and Wayne Winegarden Ph.D., “Employment and the Government Tax Wedge”, Laffer Associates, June 9, 2011.
8 With a couple of deductions such as charitable contributions, mortgage interest payments and rent on one’s primary residence.
9 Robert H. Frank and Ben S. Bernanke, “Principles of Macroeconomics”, Second Edition, 2004.
10 Nominal trade-weighted index comprised of the following countries’ currencies (and their 2009 weights): Euro area (35.54%), Canada (30.79%), Japan (17.61%), U.K. (8.75%), Switzerland (2.88%), Australia (2.42%), Sweden (2.02%).
11 See Arthur B. Laffer, Ford M. Scudder, and Mark A. Wise, “One Step Forward, Two Steps Back: The Road Ahead for U.S. Housing”, Laffer Associates, March 31, 2010.
12 A civil service clause banning strikes by government unions 5 U.S.C. (Supp. III 1956) 118p.
13 Governor Arnold Schwarzenegger, “State of the State Address”, January 5, 2006.