Fox has attacked the economic recovery under President Obama by claiming that if Obama just adopted the policies of former President Ronald Reagan, there would be a stronger recovery. But as economists have pointed out, the Reagan recession ended not because of Reagan's fiscal policies but because the Federal Reserve drastically cut interest rates. Because interest rates are already at zero, such a rate cut is not a possible option now.
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Fox Invokes The Reagan Recovery As A Model Of Comparison
Fox's Kelly Wright: "What Did Reagan Do To Turn The Recession Around? Does President Obama Need To Embrace These Strategies As Well?" From the May 5 edition of Fox News' America's News Headquarters:
KELLY WRIGHT (co-host): President Obama facing stiff economic headwinds as he officially launches his re-election bid. President Ronald Reagan faced a similar challenge you'll recall back in 1984. Take a look at this: Under Reagan, a recovering economy added more than 360,000 jobs, this compared to President Obama's April jobs number coming in at 115,000.
So what did Reagan do to turn the recession around? Does President Obama need to embrace these strategies as well? Joining me now, founder and managing partner of Cargile Investments, Mickey Cargile. Mickey, it's good to have you sir, and weighing in with your expertise about this. What do you think the president needs to do in order to duplicate what President Ronald Reagan was able to achieve in the April leading up to his November election?
MICKEY CARGILE (managing partner, Cargile Investment Management): Well it's so difficult to even compare the two periods. You know, that was 30 years ago, and the economy today is three and a half times larger than it was back then, so you think it would be even easier to create a number of jobs today. But the thing that the numbers really don't tell us is what kind of jobs are being created today. You know many of them are minimum-wage service jobs, and they're not long-term career jobs like were created in 1984.
Reagan used the tax code to incent people to invest in our economy. And by doing so, he re-created the manufacturing sector. That created high paying jobs, and yes it made some people very rich, but here's a newsflash for you, it's the rich people that employ the rest of us. So it's very important that we have that incentive that rewards success and not try to punish people because they are successful.
WRIGHT: So Reagan also had it then -- according to what you're saying even though it's 30 years ago -- Reagan had the ability to see that there was something to be said for that trickle-down theory, that perhaps the rich could go out there and create the jobs. What other tools did he have in his arsenal that perhaps President Obama does not or has not used?
CARGILE: Well it's just that policy of where Reagan embraced capitalism and personal accountability, today we embrace something else that is very near socialism and entitlement. You know, one way to get the employment rate down is simply stop this insane proliferation of unemployment benefits that proliferate forever.
You know, my heart goes out to people that lose their jobs, but after 6 months, if you're still unemployed, you've got to look in the mirror and get re-trained and get out and find a job that is available, or create your own job. You know so many successful people are people who are able to realize their potential simply because they lost a job, could not find a job, and had to create their own. [Fox News, America's News HQ, 5/5/12]
Fox's Kelly: Compared To The Reagan Recovery, "We Are Way Off Pace Of The Recovery We Were Going Through Back Then." From the May 4 edition of Fox News' America Live:
MEGYN KELLY (host): Well a dismal jobs report showing more Americans have stopped looking for work altogether. The Labor Department showing employers added only 115,000 jobs last month. Compare that to April of 1984. After the most severe recession since World War II under President Reagan, the U.S. economy added 363,000 jobs that month. It's so often you hear the president's recovery compared to President Reagan's recovery, but you can see the disparity in where we were then: 363 added in April of '84 versus 115,000 added this month. Joining me now, Matt McCall, president of Penn Financial Group. Matt, I mean it says a lot, our brain room says that 363,000 back in April of 1984 would be more like 450,000 jobs being created today. I mean, we are -- the point is we are way off pace of the recovery we were going through back then. This recovery looks nothing like that one.
MATT MCCALL (president, Penn Financial Group): No it looks nothing like it, and unfortunately the recovery is getting actually weaker the last couple of months, which is even more troubling. And, you know, a lot of people that argue against that point Megyn, they say well 'it's just one month, let's not just look at one month' well I look back at the first eleven quarters of the "Regan Recovery" back in the 80's, and we had created 9.4 million jobs. The first 11 quarters of the Obama recovery, 3.9 million jobs, so that's a dramatic difference. You can't say "well because of the warm weather, it's just this one month." overall this recovery is not even comparable to the recovery we saw under Reagan. [Fox News, America Live, 5/4/12]
Fox Contrasts Job Creation Rates Under Obama And Under Reagan. During the America Live segment, Fox ran the following on-screen graphic:
[Fox News, America Live, 5/4/12]
WSJ's Moore: Reagan "Cut Tax Rates, He Deregulated Businesses, He Got The Inflation Rate Down, All The Opposite Things Though That Obama Has Done." From the May 4 edition of Fox News' The O'Reilly Factor with guest host Laura Ingraham:
INGRAHAM (guest host): Alright Moore, how much interest are we paying every year on that debt? What's that interest now?
STEPHEN MOORE (Wall Street Journal): It's very soon going to be the single largest expenditure in the entire federal budget is interest on the debt. And Laura, when you ask the question what do we do? How do we get out of this kind of crisis? You know the answer. I know the answer. I think the American people know. Reagan did it in 1981 when he inherited a great economic crisis. He cut tax rates, he deregulated businesses, he got the inflation rate down, all the opposite things though that Obama has done.
MOORE: And by the way, at this stage of the recovery under Reagan, we weren't having 120,000 jobs a month, we were 300, 400, we had--
INGRAHAM: Big difference
MOORE: Under President Reagan, we were at a million jobs in one month, where are those kinds of numbers? Where are they? [Fox News, The O'Reilly Factor, 5/4/12]
But The Reagan Recession Ended With Interest Rate Cuts, Which Aren't Possible Now
Reagan Economist Suggested Interest Rate Cuts Drove Economic Recovery. Michael Mussa, a member of Reagan's Council of Economic Advisers, wrote in an essay for American Economic Policy in the 1980s (University of Chicago Press, 1995) that when the Federal Reserve cut the discount rate a half percentage point on July 20, 1982, it "signal[ed] the beginning of what would become a four-and-a-half-year period of quite rapid monetary expansion. During this period, interest rates, both short and long term, would be driven significantly lower, and the U.S. economy would substantially recover from the devastation of both inflation and recession." [American Economic Policy in the 1980s, 9/1/95, via Google Books]
CBO: "Lower Interest Rates After Mid-1982 Permitted The Recovery To Begin." An August 1983 CBO report titled "The Economic and Budget Outlook: An Update" concluded that "[l]ower interest rates after mid-1982 permitted the recovery to begin":
Recovery started in December 1982 from the deepest postwar recession, the second of two since 1980. Both recessions were brought on by monetary restriction aimed at bringing inflation under control. Lower interest rates after mid-1982 permitted the recovery to begin. Real GNP grew at a 2.6 percent annual rate in the first quarter and at an 8.7 percent annual rate in the second quarter of 1983. [Congressional Budget Office, August 1983]
CNN: "The Recession Of The Early 1980s Was Caused By Runaway Inflation, Which The Federal Reserve Countered By Hiking Interest Rates." From a May 4 CNN Money article titled "Why Obama can't match the Reagan recovery":
Reagan had an advantage over Obama: The recession of the early 1980s was caused by runaway inflation, which the Federal Reserve countered by hiking interest rates. When inflation dropped, the Fed lowered rates and a massive economic boom resulted.
The major causes of the recent recession were a banking crisis and housing bubble that exploded during President George W. Bush's final months in office.
Another difference: With comparatively small debt loads, Reagan was able to push through a 23% across-the-board cut of individual income tax rates. Obama, meanwhile, entered the presidency with substantial budget deficits and an economy contracting at a rate of 6.7%. [CNN Money, 5/4/12]
Paul Krugman: "The Early-80s Slump Was Brought On By A Huge Rise In The Fed Funds Rate, Which Left Lots Of Room For Cuts." From a January 27 New York Times blog post titled "Postmodern Business Cycle" from Nobel-prize winning economist Paul Krugman:
[T]his gives me an occasion to talk about why the sluggish recovery was predictable -- and predicted. This is not an after-the-fact rationalization, I was explaining very early on that this wasn't going to be like the 1981-2 recession.
As I said then, there's a definite change in the character of recessions after the mid-1980s. Before then, recessions were basically brought on by the Fed, which raised interest rates sharply to curb inflation, causing a slump in housing. When the Fed decided that we had suffered enough, it let rates fall again, and there was a surge from pent-up housing demand. Morning in America!
Since then, however, inflation has been well under control, and booms have died of old age -- or more precisely, they have died because of overbuilding and an excessive level of debt. The Fed is then in the position of trying to goose housing (which is the principal channel for monetary policy) even though housing may already be overbuilt (which was the point I was making, sarcastically, when I said long ago that the Fed has to create a housing bubble), and it is cutting rates from an initial level which isn't that high. So the odds of running up against the zero lower bound are high, and recovery can be a long time in coming.
You can see what I'm talking about here:
The early-80s slump was brought on by a huge rise in the Fed funds rate, which left lots of room for cuts, and was driven by a deep slump in housing, which meant that there was lots of pent-up demand when rates fell again. The 2007-? slump was brought on by the bursting of a housing and debt bubble, and left the Fed largely pushing on a string.
And what about Reagan? Reagan who? This had nothing to do with tax cuts. Did I mention that Reagan actually raised taxes in 1982? [The New York Times, 1/27/12]
Krugman: "Right Now, The Interest Rate Is Zero. The Fed Can't Rescue Us This Time." During the February 6, 2009, edition of MSNBC's Morning Joe, Krugman noted: "In 1982, when the economy was deeply depressed, the Federal Reserve said, 'OK, we've got to do something about this,' and they cut interest rates from 13 percent to around 7 percent and the economy took off." Krugman continued: "Right now, the interest rate is zero. The Fed can't rescue us this time, and that's why we can't do the things we did in the '80s. We have to have an approach that harks back to the things that worked very well in the first four years of the New Deal until Franklin Roosevelt was persuaded to go orthodox all over again." [MSNBC, Morning Joe, 2/6/09, via Media Matters]
And The "Engine Of Growth" That Existed In The 1980s Isn't There Now
Businessweek: "Obama's Critics Call For A Return To Reaganomics, But The Gipper's Downturn Was No Match For This One." From a Feb 2 Bloomberg Businessweek article titled "A Tale of Two Election Year Recoveries":
Obama has struggled to master a far more complex situation. The Reagan recession was sparked by the high inflation of the Jimmy Carter years and the decision by then-Federal Reserve Chairman Paul Volcker to raise interest rates to as high as 20 percent in May 1981 to smother higher prices. Although the high rates caused a lot of pain, they left Volcker with plenty of room to cut until the recession had eased. Rate cuts started in June 1981. By December 1982, rates were down to 8.5 percent. The economy responded quickly to monetary easing. Fed Chairman Ben Bernanke, in contrast, has little room left for cuts; the federal funds rate is close to zero. "When you have a deep financial crisis paired with recession, it's a completely different animal than a normal recession," says Kenneth Rogoff, an economics professor at Harvard University. "The one in the Reagan Administration was a more normal one."
The presence of so much debt in the economy makes companies and consumers reluctant to borrow and banks reluctant to lend, no matter how low interest rates go. Debt today remains a greater drag on the U.S. than in 1983, says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington and co-author, with Rogoff, of This Time Is Different: Eight Centuries of Financial Folly. In the third quarter of 2011, household debt was 86 percent of GDP, compared with 47 percent in the third quarter of 1983, according to the U.S. Commerce Dept. "The capacity for households to be the engine of growth that they have been in past recoveries is simply not there," Reinhart says.
"Reagan could talk about morning in America and could come from that perspective," says Peter D. Hart, who was a pollster for Walter Mondale, Reagan's Democratic opponent in 1984. "The major difference this time is that Americans are much more likely to believe we are in a long-term decline." Reagan, too, might have to struggle to convince voters it's morning in America in 2012. [Bloomberg Businessweek, 2/2/12]