The big‐spending massive pork barrel bill known as the stimulus package has been signed into law. Richard Rahn reflects back on the economic crisis three decades ago and finds that the Obama plan looks a lot more like the Carter than the Reagan plans. And we know which one of those worked best.
President Jimmy Carter inherited a growing economy but one with relatively high inflation and high unemployment. He left office with the economy in a recession, high unemployment, and a record high inflation and interest rates (the prime rate at one point had reached 21 percent). Mr. Carter’s policies were to maintain the very high marginal income tax rates in effect at that time, coupled with a small expansion in the relative size of government.
Mr. Carter had appointed G. William Miller as Federal Reserve chairman, who proceeded to engage in a very rapid monetary expansion. The inflation disaster caused by the excessive monetary expansion caused Mr. Carter to replace Mr. Miller with Paul Volcker at the very end of his administration.
President Reagan inherited an economic situation even worse than the one President Obama has. When Reagan took office, the economy had been in recession for about a year, the unemployment rate was almost identical to today’s, but the labor force participation rate was smaller, and inflation was out of control. At the time, the newspapers were filled with stories about the “worst economy since the Great Depression” — which, unlike today, was true, and the economic establishment seemed to be bereft of ideas of what to do.
Credit markets were in a mess, and both businesses and consumers were not borrowing because they could not afford the interest rates. President Reagan, unlike his critics, had a clear plan to revive the economy, which included: monetary restraint to stop inflation; large reductions in marginal tax rates to renew the incentives to work, save and invest; and a reduction in nondefense spending as a percentage of gross domestic product (GDP).
Unlike other recent presidents, Reagan actually kept and delivered on his promises, which resulted in high growth (7.2 percent in 1984 alone) and large reductions in the unemployment rate — particularly, inflation. He stuck with Mr. Volcker and his monetary restraint because he understood inflation had to be brought under control, even though he also knew it would necessarily prolong the recession. How many of today’s politicians would be willing to take the heat for the long run good?
It is hard not to ask: do the supporters of the “stimulus” bill really think it will work? Or did they decide long ago that policy effectiveness was irrelevant to their political success?