Friday, January 22, 2016

Should Candidates (and Voters) Be More Optimistic?

Justified Optimism

Maybe Not

In a recent Washington Post opinion piece, Jonathan Capehart praises President Obama's optimism about America's future, optimism the President recently expressed in his final state of the union address. Capehart also analogizes President Obama's optimism to that expressed by President Ronald Reagan in the latter's 1989 farewell address.  In that address, President Reagan referred to America as a "shining city on a hill" that was, at the end of his administration, "more free, more prosperous, more secure and happier than it was eight years ago." Capehart also chastises the current field of Republican presidential candidates for rejecting such optimism. According to Capehart, these candidates repeatedly invoke Reagan, but "bombard us with gloom, doom and defeatism."

Capehart is certainly correct that both President Obama and President Reagan struck optimistic tones as their administrations came to a close.  He is also correct that many Republican candidates for President seem anything but optimistic about the nation's current trajectory.  At the same time, Capehart does not mention the fact that most Americas do not seem to share President Obama's optimism. For instance, two thirds of Americans believe the nation is "on the wrong track," compared to 55 percent early in President Obama's first term.  (Go here for these data.)  Only one third of Americans believe that today's children will be better off than their parents.  (See here.)  The rate of new business formation is near a 30 year low. Capehart does not consider the possibility that glum Republican presidential candidates are simply reflecting the mood of the people --- Republicans, Democrats and Independents --- they hope will elect them.

Of course it may be that the American people are simply unduly pessimistic about what the future holds for this country. However, a little reflection, informed by recent economic history, suggests that there is significantly less reason for optimism about the nation's economic future than there was when Reagan delivered his farewell address in 1989.  While President Reagan left his successor a booming economy resulting in robust job creation, President Obama's successor will inherit a tepid economic recovery which has left millions of Americans behind and with little or no prospect of improvement.

Like President Obama, President Reagan inherited a deteriorating economy.  When Reagan took office in January, 1981, the prime interest rate had just hit 21.5 percent, inflation was running over 13 percent, and unemployment was 7.5 percent, on its way to 10.8 percent in December, 1982.

Like President Obama, who proposed an economic stimulus package that Congress would later pass, President Reagan proposed a package of tax cuts also designed to stimulate the economy, and Congressman Jack Kemp led the Congressional efforts to enact Reagan's proposals.  (To his credit, President Obama would later award Kemp the Medal of Freedom.)   The plan, which cut tax rates for all Americans, was similar in design and rationale to that offered by President John F. Kennedy in 1962.  As previously explained on this blog, President Kennedy sold his plan as an effort to stimulate economic growth, reduce unemployment, and, ultimately, eliminate the short run budget deficit that such cuts would produce.   As President Kennedy explained in a December, 1982 speech to the Economic Club of New York:

"The purpose of cutting taxes is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring about a budget surplus."

Congress enacted President Reagan's proposed tax cuts in the summer of 1981.  While a portion of the cuts took effect immediately, most were phased in over the next three years.  His administration also accelerated the pace of deregulation. What followed was a veritable economic boom.  While the economy contracted in 1982, a recovery started in November of that year.  Over the six year period 1983 through 1988, the American economy grew at an annual rate of 4.6 percent on average.  (See here)  During the same period, total employment increased from 88,993,000 in January, 1983 to 106,906,000 on December 1, 1988, a 20.1 percent net increase. (See here).

The economy has not experienced a similar boom under President Obama, despite passage of his stimulus package.  The economy contracted during 2009 and began a recovery in the summer of 2009. Over the six year period of 2010 through 2014, GDP grew an average of 2.2 percent, less than half the rate during the Reagan boom, with annual growth never exceeding 2.4 percent.   During the same period, total employment grew from 129,717,000 in January, 2010 to 143,242,000 in December, 2014, a 10.3 percent net increase.  (See the sources cited in the prior paragraph for these data.)

In short, the rate of economic growth during the Reagan recovery was more than double the rate for Obama recovery.  Moreover, the rate of employment growth during the six years of the Reagan recovery was more than 60 percent higher than the rate during the first six years of the Obama recovery.  Nor is there any indication that the Obama recovery is picking up steam, with 2015 growth predicted to be a disappointing 2.5 percent.  (By contrast the economy grew 3.7 percent in 1989.)  It is little wonder that many Americans are pessimistic about the nation's economic future.  Even former President Bill Clinton recently expressed his view that, if elected, former Secretary of State Hillary Rodham Clinton would "do what needs to be done now to restore prosperity."  Like former President Clinton, many Americans are old enough to recognize robust economic growth when they see it, and they know this is not it.

Of course, GDP and employment growth are not the only indicators of national well-being.  A nation might choose policies that alleviate poverty or result in a more equitable distribution of income, even if such polices cause somewhat smaller economic growth.  However, there is no indication that slower growth has bought us greater equality or lower poverty.  Poverty rates are higher than when President Obama took office and lower than 1989, when President Reagan left office.  (See page 12 of this report.)  Income inequality is by many accounts on the rise.  The Reagan boom brought greater wealth and less poverty; the Obama recovery has been disappointing by comparison.

None of this is to condone the sort of pessimism that Capehart claims to see in today's crop of Republican candidates.  In 1980 then-citizen Reagan believed the country was moving in the wrong direction but was nonetheless optimistic about America's future.  In particular, he had faith in the power of free markets and individual initiative and a plan for unleashing both to serve the common good.  With the help of Congress, his administration implemented that plan, and the rest is (economic) history.  Hopefully one of the current presidential candidates will follow Reagan's example and articulate an optimistic vision for the nation's future coupled with a workable plan for making that vision a reality.