William Galston on President Obama's Choice of Reform over Recovery

In a superb op-ed in the Wall Street Journal, entitled "[h]ow Obama's Economy Spawned Trump," William Galston of the Brookings Institution contends that the weak economic recovery that began in 2009 fueled the popular discontent that begat the presumptive Republican nominee. While Galston gives the President credit for securing passage of the 2009 "stimulus package" and formulating the "bailout" of General Motors and Chrysler, he also contends that the President had no follow up plan for bolstering the recovery which, as previously explained on this blog (see also here), has been exceedingly slow. Instead, Galston says, the President chose to spend his scarce political capital on securing passage of the so-called "Affordable Care Act" and regulatory efforts to combat "Global Climate Change."  Had the President remained focused on nurturing the recovery, Galston says, he could have expended his political capital on advocating and securing additional deficit spending on various infrastructure projects, such as highways, thereby further stimulating the economy and bolstering the recovery.

Galston's trenchant analysis bolsters the adage that those who ignore the lessons of history are doomed to repeat it. This is not the first time that a President facing a deep recession has chosen reform over recovery.  In 1933, Franklin Delano Roosevelt secured passage of the National Industrial Recovery Act, his administration's central economic recovery plan.   Among other things the NIRA imposed so-called "codes of fair competition," along with above-market minimum wages and requirements that firms recognize and negotiate with labor cartels also known as unions.  As John Maynard Keynes explained in a letter to the New York Times, the NIRA's wage and price fixing provisions were tools of "Reform and probably impeded recovery."  Subsequent analysis has verified Keynes' prediction, finding that the NIRA's wage-fixing provisions in particular, while furthering what Keynes called "redistribution," also helped deepen and lengthen the Great Depression by several years.  (See here and  here)  If Galston is correct, then President Obama, too, chose reform over recovery, with negative consequences for the nation's overall economic well-being.

At the same time, Galston overstates his case in a couple of ways. First, he likely overstates the impact of the initial stimulus package. For one thing, the $800 Billion package was spread over several years, thus constituting a very small share of overall GDP each year. Indeed, in 2009, Galston himself opined that some of the package's proposed projects would "take effect slowly over many years, muting their stimulative consequences." Like Martin Feldstein, Galston proposed allocating stimulus funds to immediate military spending (see also here discussing Feldstein's proposal.). Moreover, as this blog explained at the time, the net impact of the 2009 package was likely smaller than its nominal price tag, insofar as some such deficit spending simply displaced debt and resulting spending that states would have incurred anyway.  (See this testimony by John Taylor at Stanford, who summarizes research finding such a displacement effect.)  Second, as previously explained on this blog, any claim that the auto bailout was worth the cost does not survive scrutiny.  All in all, however, Galston makes a powerful point.  It would be ironic indeed if the President choice of reform over recovery leads to the election of a President hostile to those reforms.

We Need More Reagan, Not Less

Had A "Reaganite" Plan

Executed the Plan

In a recent op-ed, David Brooks claims that what he calls the "post-Trump" Republican party will have to reject Reaganism in favor of a new organizing philosophy. While Brooks admits that the "Reagan orthodoxy" was "right for the 1980s," he also claims that this template is "increasingly obsolete."  In particular, Brooks claims that: "[t]he Reagan worldview was based on the idea that a rising economic tide would lift all boats.  But that's clearly no longer true." Analogizing to Thomas Kuhn's work on scientific revolutions, Brooks observes that today's Republicans "are still imprisoned in the Reaganite model . . . ask Reaganite questions [and] propose Reaganite policies." Because the Reaganite model no longer works, Brooks says, conservatism is in a crisis state and must develop a new model.   Among other things he suggests that conservatives turn away from economic theory and embrace Sociology because, in his words: "Homo economicus is a myth and conservatism needs a worldview that is accurate about human nature."

Brooks' assessment of modern Republican ideology rests upon a crucial assumption, namely, that a robustly rising economic tide does not lift all boats.  However, he offers no evidence to support this assumption.  To be sure, the current economic recovery has left out millions of Americans.  Some cannot find jobs and others must work two or more part-time jobs to make ends meet.  Total employment rose a mere 10 percent from 2009 through 2014. Median household income, is still below what it was in 2008, and poverty rates are still higher. In 2015, the United States experienced its 10th straight year of economic growth below 3 percent, apparently a record, though not the sort of record that any country brags about.  (GDP growth in 2015 was 2.4 percent.)

Still, these data shed no light whatsoever on the "Reagan worldview," or the usefulness of "Reaganite policies" derived from economic theories assuming that human beings are rational actors that respond to incentives.  In March, 1983 President Reagan, who had majored in Economics, predicted that his policies across-the-board tax cuts (inspired by John F. Kennedy), reduced regulation and free trade would produce an economic recovery that would be "powerful and sustained."  (The second photo above depicts President Reagan signing the Economic Recovery Tax Act of 1981.)  He was correct. Between 1983 and 1988 (inclusive), the economy grew at an annual average rate of 4.6 percent, more than twice the rate of growth during this most recent recovery. During the same period median real household income rose 10.9 percent and rose another 1.8 percent in 1989. The economy added 17,913,000 jobs, increasing total employment by 20.1 percent, twice the rate of the current recovery.  Exports skyrocketed as more productive U.S. industries won new markets abroad.  Tax relief allowed Americans in all economic classes to keep more of their income. Rules indexing the standard deduction and tax brackets for inflation preserved the value of the deduction and protected low and middle income taxpayers from the sort of "bracket creep" that had pushed Americans of modest means into higher tax brackets in the late 1970s.  A significant portion of the tax burden shifted from the middle class to those in the "top one percent" of the income distribution.

None of this is to say that the Reagan recovery improved the lives of each and every American.  Still, the difference between that recovery and the most recent one is stark indeed. It is little wonder that, less than two years into the Reagan recovery, the American people resoundingly reelected President Reagan in a landslide, i.e., 49 of 50 states and nearly 59 percent of the popular vote.  In so doing the voters rejected former Vice President Mondale's platform of higher taxes, Trump-like economic protectionism and more intrusive federal regulation.  The economy continued to grow into 1990, thus constituting the longest peacetime expansion in U.S. History.

This blogger believes that most Americans would be thrilled by an economic recovery similar to that which occurred between 1983-1990.  Any decision to reject the "worldview" that helped produce that recovery should be based on sound argument and hard evidence, not cavalier speculation.  We need more Reagan.  Not less.