A week after Ronald Reagan’s 100th birthday celebration, comparisons between Presidents Obama and Reagan continue.
The conversation began when Obama praised Reagan in a USA Today op-ed. He commended Reagan’s leadership, his confidence in and optimism for America, and his great ability to communicate his vision for the country. Reaganites like myself appreciate these sentiments.
But so far, the differences between the two presidents are still huge.
Begin with the economy. Reagan and Obama both inherited deep and brutal recessions. But the first six recovery quarters look completely different for each president.
So far, real GDP has averaged only 3 percent annually for Obama. Employment as defined by nonfarm payrolls has increased by a paltry 121,000.
On the other hand, going back to Reagan’s first six recovery quarters, real GDP averaged 7.7 percent annually while nonfarm payrolls rose by 5.3 million.
No two situations are exactly alike. Reagan inherited massive double-digit inflation with 20 percent interest rates. Obama was left with a colossal financial meltdown. But Reagan’s economic vision put private-sector free-enterprise at the center. Obama has chosen a massive expansion of government power.
These are huge differences. One succeeded, while thus far the other has not.
While Obama’s first act was an $800 billion government-spending package, one of Reagan’s first decisions was a near $50 billion domestic-spending cut (the equivalent of a $100 billion cut today). Obama went for a nationalized health-care plan, energy cap-and-tax-and-trade, and pro-union card check. Reagan ended wage and price controls, deregulated all energy prices, terminated the Synthetic Fuels Corp., and fired the striking air-traffic controllers. Big differences.
Drawing from the work of Arthur Laffer and Robert Mundell, Reagan saw the economic-growth benefits of limited government, lower tax rates, and a dollar as good as gold. Gold prices plunged as Reagan and Paul Volcker worked to vanquish inflation. Ever-soaring inflation was the cruelest tax hike of all. But in the Reagan years, the inflation rate dropped from near 13 percent to as low as 2 percent — a huge disinflation tax cut. Accompanied by lower marginal tax rates, the Reagan policies sparked a powerful recovery in business and jobs.
Reagan slashed tax rates across-the-board for individuals, investors, and businesses. At the margin, his reforms lowered the top personal rate from 70 percent to 28 percent. And he left a simple two-bracket tax code that cut thousands of pages of IRS rules and regulations.
And while the top individual tax rate was slashed under Reagan, individual income-tax revenues increased from roughly $300 billion to $450 billion. In other words, the Laffer curve worked. With surging economic growth, the incentives from lower tax rates actually raised tax revenues.
Mr. Obama, on the other hand, campaigned to raise tax rates on successful earners and investors. Along with the dozens of taxes legislated into Obamacare, these are all job stoppers.
Only after the 2010 election landslide did Mr. Obama finally agree to extend the 2003 Bush tax rates for a couple of years. But, he continues his pledge to hike those taxes again when the deal expires in 2012.
From his experience as a movie actor facing a 90 percent tax rate, Reagan always encouraged success. Everyone’s success. And he came to believe that if it pays more after tax to work and invest, then people will do so.
Of course, Reagan increased the defense budget to defeat the Soviets. But during the seven fat years of growth — to use the late Robert Bartley’s term — overall federal spending dropped from 23 percent of GDP to 21 percent. (Obama has taken the size of government to 25 percent of GDP.)
As for the budget deficit, Reagan left it around 3 percent of GDP — almost exactly where he inherited it.
Overall, Reagan’s policies created 21 million new jobs as real GDP averaged 3.5 percent annually during the seven fat years of recovery. The unemployment rate dropped to 5.3 percent from 10.7 percent. The stock market rose nearly 200 percent. And household net worth expanded by $8 trillion.
Quintessentially, Mr. Reagan was a private-sector, free-enterprise man. His policies of low tax rates, lighter regulation, domestic-spending limits, and low inflation rescued the country from the malaise of stagflation. Meanwhile, his military build-up, tough diplomacy, and “evil empire” battle cry defeated Soviet communism. Reagan was an optimist, but a tough-minded one. He believed in American exceptionalism. He also fervently believed in freedom.
Since last November’s Tea Party election, Obama has read about Reagan, talked about Reagan, and very cautiously moved economic policy in the direction of Reagan. I am open-minded. Let’s hope the current president stays on his new Reagan path.
But let’s never forget: Ronald Reagan saved the country 30 years ago. He also saved our future. Hopefully Mr. Obama will learn from that.
Larry Kudlow hosts CNBC’s “The Kudlow Report.”