Obamanonics vs. Reaganomics

By STEPHEN MOORE, WSJ

One program for recovery worked, and the other hasn't

If you really want to light the fuse of a liberal Democrat, compare Barack Obama's economic performance after 30 months in office with that of Ronald Reagan. It's not at all flattering for Mr. Obama.

The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.

By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would "overheat." In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a "double-dip" recession. By the end of Reagan's first term, it was Morning in America. Today there is gloomy talk of America in its twilight.

My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn't.

The Reagan philosophy was to incentivize production—i.e., the "supply side" of the economy—by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.

The Keynesians in the early 1980s assured us that the Reagan expansion would not and could not happen. Rapid growth with new jobs and falling rates of inflation (to 4% in 1983 from 13% in 1980) is an impossibility in Keynesian textbooks. If you increase demand, prices go up. If you increase supply—as Reagan did—prices go down.

The Godfather of the neo-Keynesians, Paul Samuelson, was the lead critic of the supposed follies of Reaganomics. He wrote in a 1980 Newsweek column that to slay the inflation monster would take "five to ten years of austerity," with unemployment of 8% or 9% and real output of "barely 1 or 2 percent." Reaganomics was routinely ridiculed in the media, especially in the 1982 recession. That was the year MIT economist Lester Thurow famously said, "The engines of economic growth have shut down here and across the globe, and they are likely to stay that way for years to come."

The economy would soon take flight for more than 80 consecutive months. Then the Reagan critics declared what they once thought couldn't work was actually a textbook Keynesian expansion fueled by budget deficits of $200 billion a year, or about 4%-5% of GDP.

Robert Reich, now at the University of California, Berkeley, explained that "The recession of 1981-82 was so severe that the bounce back has been vigorous." Paul Krugman wrote in 2004 that the Reagan boom was really nothing special because: "You see, rapid growth is normal when an economy is bouncing back from a deep slump."

Mr. Krugman was, for once, at least partly right. How could Reagan not look good after four years of Jimmy Carter's economic malpractice?

Fast-forward to today. Mr. Obama is running deficits of $1.3 trillion, or 8%-9% of GDP. If the Reagan deficits powered the '80s expansion, the Obama deficits—twice as large—should have the U.S. sprinting at Olympic speed.

The left has now embraced a new theory to explain why the Obama spending hasn't worked. The answer is contained in the book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff. Published in 2009, the book examines centuries of recessions and depressions world-wide. The authors conclude that it takes nations much longer—six years or more—to recover from financial crises and the popping of asset bubbles than from typical recessions.

In any case, what Reagan inherited was arguably a more severe financial crisis than what was dropped in Mr. Obama's lap. You don't believe it? From 1967 to 1982 stocks lost two-thirds of their value relative to inflation, according to a new report from Laffer Associates. That mass liquidation of wealth was a first-rate financial calamity. And tell me that 20% mortgage interest rates, as we saw in the 1970s, aren't indicative of a monetary-policy meltdown.

There is something that is genuinely different this time. It isn't the nature of the crisis Mr. Obama inherited, but the nature of his policy prescriptions. Reagan applied tax cuts and other policies that, yes, took the deficit to unchartered peacetime highs.

But that borrowing financed a remarkable and prolonged economic expansion and a victory against the Evil Empire in the Cold War. What exactly have Mr. Obama's deficits gotten us?

Mr. Moore is a member of the Journal's editorial board.

Why Americans Hate Economics

By STEPHEN MOORE, WSJ

Christina Romer, the University of California at Berkeley economics professor and President Obama's first chief economist, once relayed the old joke that "there are two kinds of students: those who hate economics and those who really hate economics." She doesn't believe that, but it's true. I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense. Alas, the policies of this administration haven't boosted the profession's reputation.

Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance "creates jobs." She received this slap down: "I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper."

Mr. Carney explained that unemployment insurance "is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren't earning a paycheck are going to spend the money that they get . . . and that creates growth and income for businesses that then lead them to making decisions about jobs—more hiring."

That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.

I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't work. I can say with 100% certainty as a parent that in the Moore household this will lead to less work.

Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.

A few months ago Mr. Obama blamed high unemployment on businesses becoming "more efficient with a lot fewer workers," and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?

Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical "multiplier"—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars.

How did modern economics fly off the rails? The answer is that the "invisible hand" of the free enterprise system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

As Donald Boudreaux, professor of economics at George Mason University and author of the invaluable blog Cafe Hayek, puts it: "Macroeconomics was nothing more than a dismissal of the rules of economics." Over the years, this has led to some horrific blunders, such as the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high: To encourage food production, destroy it.

The grand pursuit of economics is to overcome scarcity and increase the production of goods and services. Keynesians believe that the economic problem is abundance: too much production and goods on the shelf and too few consumers. Consumers lined up for blocks to buy things in empty stores in communist Russia, but that never sparked production. In macroeconomics today, there is a fatal disregard for the heroes of the economy: the entrepreneur, the risk-taker, the one who innovates and creates the things we want to buy. "All economic problems are about removing impediments to supply, not demand," Arthur Laffer reminds us.

So here we are, three years of mostly impotent stimulus experiments and the economy still hobbled. Keynesians would be expected to be second-guessing the wisdom of their theories. Instead, Prof. Romer recently complained that the political system will not allow Mr. Obama to "go back and ask for more" stimulus.

And that is why Americans hate economics.

Mr. Moore is a member of the Journal's editorial board.