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economics, politics

Unemployment in the Obama economy vs. the Reagan economy

Barack Obama isn’t the first president to struggle with high unemployment.  Ronald Reagan took office at the beginning of the 80s recession where the unemployment rate almost reached 11%.  However, unemployment under Reagan fell to 7% after four years, while joblessness refuses to drop below 8% for the Obama administration.  Check out the graphic below

Why is Obama having a harder time than Reagan?  Conservatives like to attribute the Reagan recovery to lowered taxes, but few economists really believe this.  Even David Stockman, Reagan’s budget director, disputes the canard that lower taxes led to the recovery.  In truth, Reagan’s unemployment problem was different that Obama’s – American consumers in the 80s weren’t recovering from a credit crunch like we are today.

Personal savings today, compared to what it was in the 1980s, is virtually non-existent while household debt as percentage of GDP is climbing well above 130%.  The U.S. economy is 70% consumerism, and consumers today have to deal with the less savings and more debt than they did in the 1980s.  So Obama’s economy suffers from a demand-problem absent in the Reagan economy.

What can we do about.  As I’ve argued before, a lack of consumer spending can be balanced by a rise in public spending.  If there is anything we have learned from the Reagan economy is that his massive increase in defense spending helped move the economy out of recession (dare I say that Reagan was a Keynesian).  I’m not suggesting that we invest more money in our military, but there are plenty of other public works projects that need attention – roads, bridges, schools, etc.

The bottom line is that we have to be careful when we compare administrations.  Reagan and Obama faced different economic problems which can’t always be neatly compared to each other.

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