Reaganomics is dead

Reaganomics died last week. Confounding the barely disguised hopes of the paleo-conservatives who dominate the GOP, the unemployment rate didn't rise from October's 10.2 percent but instead fell to 10 percent. Even better—or worse for the nattering nabobs of negativism on the Right—the historically proven model of the Institute for Supply Management indicated that the October rate was the cyclical high for this recession.

The news that the economy is getting better had an immediate impact on the press—gloomy leads had to be instantly rewritten—and on the politicians. It’s not just that Republicans could no longer proclaim that Obama's policies had driven unemployment to "a 26-year high" (conveniently forgetting that the downturn was a Bush legacy and that the 26-year benchmark was set under Ronald Reagan). The new numbers represented a fundamental rebuke to their cherished Reagan mythology.

Compare Obama's record in this recession to Reagan's in the early 1980s. Depending on the month you pick, December or January, Reagan inherited an unemployment rate of 7.2 or 7.5 percent; for Obama it was 7.2 or 7.6 percent. Under Reagan, unemployment ultimately reached 10.8 percent and, according to the Bureau of Labor Statistics, remained above 10 percent for 10 straight months through June 1983—nearly a year and a half of the Reagan presidency.

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Assuming that unemployment this year peaked in October and continues to fall, the contrast between Reagan and Obama is stark and instructive. Having assumed office amid the worst economic crisis since the Great Depression, Obama is poised to achieve far better results than Reagan did—with both a shorter duration of high unemployment and a lower peak unemployment rate than Reagan managed. This stark difference in outcomes drives a stake through the zombie—or, as George Bush I called it, the “voodoo”—of “supply side” economics.

Supply side theory, famously and appropriately concocted on a cocktail napkin, was less a genuine response to recession than a rationalization for the permanent right-wing effort to redistribute income upward. The Reaganites used the economic distress of the early '80s to justify massive tax breaks for the rich. The result: unemployment far higher and for far longer than seems likely under Obama. In fact, unemployment was so bad in Reagan’s first two years that when it dropped back to around Carter's jobless rate it was advertised as "morning in America." In the end, the eight-year reign of Ronald Reagan was marked by the highest average unemployment of any post-war presidency.

Obama followed a very different economic course. The Obama stimulus package—and soon enough, I think, the administration will be happy to call it that—was classically Keynesian. It consisted of public spending and higher deficits to counter collapsing private demand and resulting job losses. To pass the bill, the president agreed that more than one -hird of the total would go to middle-class tax cuts. While not as fast-acting as direct government spending, the middle-class cuts were more effective than slashing taxes for the wealthy, who tend to save most of the windfall. The Congressional Budget Office recently calculated that the Obama plan so far has saved or created 600,000 to 1.6 million jobs—more than the administration claimed—and added between 1.2 percent and 3.2 percent to the GDP.

In other words, without the stimulus, which the Republicans nearly unanimously opposed, the recession would have deepened—with unemployment rising higher and lasting longer, as it did in the Reagan years.

Reagan, while glorifying balanced budgets, ran record deficits. But he ran the wrong kind of deficits. Geared toward putting money in the pockets of the privileged and the Pentagon, his deficits injected markedly less stimulus per dollar into the economy than the more progressive Obama plan. But at least Reagan had the sense to practice the deficit spending he denounced. Today's Republicans demand an economically preposterous freeze or rollback of federal outlays, which would throw the recovery into reverse. It is the consummation they devoutly wish.

Indeed, on the very day that the positive employment news hit, the Republican National Committee attacked the president for wasting "nearly a trillion dollars" and for taking the nation "in the wrong direction." Oops. The free-market fundamentalists were further discomforted when it was revealed that the TARP bailouts have not only saved the banks, but are steadily being repaid—some at a profit. Instead of Democrats desperately seeking ways to mitigate mid-term losses next November, the GOP, with nothing credible to say, may be scrambling to eke out minimal gains.

The Democrats aren't entirely out of the woods. Obama and his party can't afford a health-care defeat that would drain his authority and miniaturize his presidency. Nor can the White House afford to slide inexorably onto the LBJ path in Afghanistan. It’s not all about jobs; the unemployment rate was only 3.7 percent in the month Johnson was forcibly driven from the 1968 Democratic primaries. If Obama’s gambit in Afghanistan doesn't prove out, he'll need the political courage to pull back instead of seeking to redeem a failed war.

In the meantime, I also hope he has the courage to do something else: confront the fiscal mythology that's reinforced in virtually every modern presidency. Once he’s been vindicated on the economy—and that is coming—Obama must expose the old clichés and for the first time in half a century articulate an elementary lesson of Econ 101. The balanced budget, as President Kennedy explained in a speech at Yale, is not an inherent public good, but simply one pole of an effective fiscal policy. Sometimes deficits are justified, even essential.

As for the fate of Reaganomics, well, that's not Obama's problem. The Republicans, who haven't renewed their vision in more than a generation, are about to learn that they are intellectually naked – with nothing to camouflage the passive, negative, anti-progress, anti-regulatory dispensation that delayed recovery under Reagan and led the country into disaster under George W. Bush. There has been a slow dawning among some Republicans that facts are indeed stubborn things. Perhaps they can help their party lay Reaganomics to rest. Then, after a decent burial, and time for grieving, the Grand Old Party may once again be prepared to dare a new thought.