I wish to bring up two US Presidents who share some interesting commonalities and contrasts: Ronald Reagan (Republican), and Barack Obama (Democrat).
Both presidents have great communications skills. Reagan made people feel good while Obama was able to bring hope. Both assumed office when the country was in the middle of an economic crisis. Both were able to attract voters from outside their own political parties. Both have incurred large deficits for the US government.
Regarding contrasts, Reagan is one of the oldest presidents while Obama is one of the youngest. The two men have very different political philosophies. Reagan believes in shrinking the government, cutting taxes, and boosting defense spending. Obama believes in making government more efficient, cutting taxes only for the middle class, and using diplomacy and soft power rather than the military.
People like to judge presidents based on two criteria: government deficit and the unemployment rate. Why? They are simple to understand because only numbers are involved. Secondly, these numbers can be used effectively in political campaigns to praise one’s own party and attack the other.
Let’s see how they perform in dealing with the deficit. In 1979, the US economy was in a tailspin due to a second oil crisis coupled with high inflation. The interest rate stood at an unbelievable 18% that practically stalled any investment projects. When Reagan came to office in 1980, he cut taxes. The reason given was to stimulate the economy and create jobs. At the same time, he increased defense spending. The reason given was that the US was falling behind the Soviet Union, which he called the Evil Empire. This combination caused the US deficit to explode from $41 billion in 1979 to $221 billion in 1986. When Reagan left office in 1988, the deficit came down to $155 billion mainly as a result of more tax revenues because the economy was booming again.
When Obama came to office, the US economy was on the brink of collapse due to the financial meltdown leading to a worldwide deep recession. In 2008, the deficit under Bush had already worsened to $459 billion. When Obama took office in 2009, the deficit swelled to $1413 billion after a bank bailout of $800 billion already authorized by Bush. Later, a $700 billion stimulus package was passed to rescue the economy. The national deficit has featured in many heated debates between the Democrats and the Republicans. If the economy improves, the increase in tax revenues will reduce the deficit to some extent.
Let’s now turn to unemployment. When Reagan took office in 1980, the unemployment rate rose from the previous year’s 6.0% to 7.1%. Then it rose further to 9.6% in 1983. Having been in office for three years, Reagan was unable to create any jobs even with massive tax cuts and defense spending. Despite Reagan’ popularity, the public was impatient with him for the slow economic recovery. This shows the limits of government stimulus in job creation. It all depends on the private sector. The business cycle has to run its course.
The economy finally turned around in 1984, reducing the unemployment rate to 7.5%. This enabled Reagan to trumpet his economic policies and won a landslide re-election. When he left office in 1988, the unemployment rate dropped further to 5.5%. The large national deficit that Reagon created was forgotten. So Reagan was credited with the economic turnaround, but the economy did not actually turn until the last year of his first term.
When Obama inherited the economic mess in 2009, the unemployment rate shot up from 5.8% to 9.6% in just a few months because 8 million people lost their jobs in the financial meltdown. One year later, the unemployment rate did not change but the economy had stabilized and had registered some growth. Again the government stimulus had not produced any visible effects. As usual, the economy must depend on the private sector to turn around. How many years will it take? In Reagan’s time, it took almost four years.
Now three years have passed after Obama took office. The US unemployment rate has come down from 9.6% to 8.5% in December 2011. Obama has only this year to make the unemployment down to about 7.5%, the rate when Reagan ran for re-election in 1984. It’s not impossible given the fact that the economy is turning around. It’s the pace of the recovery that really matters. If the unemployment rate comes down to 7.5% this year, Obama can also trumpet his economic policy like what Reagan had done before, and improve his chances for re-election.
This is how politics work. Success depends on the convergence of positive things that the public can understand. In this case, it’s the improving unemployment number. The national deficit may be large but will soon be forgotten, because the deficit will be reduced by more tax revenues when the economy turns around.