Reaganomics Didn't Work?

The following is a study I did a few years ago to see if we could detect a trend in economic prosperity based on the criteria: unemployment rate, prime lending rate, and economic growth (percent change in GDP). I wanted to track a change in numbers based on economic policy. I would like to go through a much more in-depth study that looks at the specific policies and their overall effect. I think that this does a good job of showing the impact of Reagan's policies on the economy and how the Democrats before and after him had their own kind of impact.

In 1976, Jimmy Carter was elected with unemployment at 7.5%, economic growth at 5.6%, and the prime lending rate at 6.25%. When he left office in 1981, unemployment was at 7.5%, economic growth was at -.2%, and the prime lending rate was at 20% (This was down from a high of 21.5% just one month earlier.).

In 1981, Ronald Reagan took office with a promise to install what the press called Reaganomics. His vice-president, George Bush, called it voodoo economics. Whatever you call it, when he left office in 1989, unemployment was at 5.4%, economic growth was at 4.2%, and the prime lending rate was at 10.5%. Unemployment spiked in 1982 at 10.8%, the worst ever since they started keeping track in 1948. Whatever George Bush may have thought about Reaganomics during the 1980 campaign, he changed very little of the plan and by the time he left office in 1993, unemployment was at 7.3%, economic growth was at 3%, and the prime lending rate was at 6%. It was at this point that Bill Clinton was telling anyone who would listen that we were suffering through the worst economy in 50 years.

And what of the Clinton years? We’ve heard so much about the Clinton boom of the 90’s. What are the real numbers? We already know what they were when he took office. How did they pan out in the end? First, economic growth: Over the eight year period, he had a very healthy average of 3.7% with a high of 4.4%, a low of 2.7% (twice) and ending at 3.8%. Compared to Reagan’s average of 3.4% with a high of 7.3% and a low of –2% (in 1982), George Bush’s average of 1.95% with a high of 3.5% and a low of
-.5%. Clearly the Reagan years kept pace with the Clinton years and may have been better. I’ll get to that later. Let’s look at unemployment: 4.1% when Clinton left office in 2001. Very healthy. Virtually everyone who could work was working. In fact, after the high of 7.8% in the middle of 1998, the unemployment rate continued to fall and from the middle of 1997 until the end of his term, it never went above 5% including a low of 3.8% in 2000. Astounding! At that point, literally every American who could work was working. This is tantamount to 0% unemployment, which is unachievable. There will always be a certain percentage of the population that cannot work. This is stellar news. The prime lending rate, however, was at 9%. This is a 50% increase from where it was when Clinton took office. Could this be an indicator of things to come? Certainly, by any standard the Clinton years were economically very good.

But economic policies are not like flipping a light switch. You don’t simply wave a magic wand and change the way business is done in this country. It takes time for policies to be devised and implemented. That’s why I have devised the two-year rule. There is always a bit of lag time between the time a policy is dreamed up, put before congress, voted on, implemented and some results start to take shape. Let’s look at the Carter years for starters. The average economic growth for his term from 1977-1980 is 3.3%, not that bad. But do you really think that his economic policies were in play in Jan. of 1977? How about Feb? In fact, do you think you can say he had anything to do with the success or failure of economic growth in all of 1977? In fact, during this year, unemployment was going down as well. Things were going along very nicely. But what if we offset these numbers by two years. Not an arbitrary number but a reasonable amount of time for someone’s economic policies to take effect. From 1979-1982, economic growth is an abysmal .9%! That is absolutely stagnant. Although unemployment had been reduced to 5.9% in 1979, it grew to an uncontrollable amount of 10.8% in 1982!! Almost double! The worst in the history of the statistic. Clearly, the Carter years were a complete economic failure. Certainly a much more likely candidate (if not, in fact, the only candidate) for the worst economy since WWII.

Ronald Reagan took office in Jan. of 1981. His tax cuts weren’t approved by congress until Aug. of 1981. Would you say that the economic progress (or regress) during this period is Reagan’s or Carter’s? Do you think that there was significant change in the economy in September of 1981? October? Certainly, the two-year rule is a good one. Implementing that for Reagan, we get a revised number of 4%! That’s better than his previous and better than the Clinton boom of the 90’s! Does the two-year rule affect Bush? His new number is 2.3%. Substantially better than before.

But what of the Clinton boom? How does the two-year rule affect him? Clinton’s new number is 3.2%. Not bad, but not close to Reagan. And remember, Clinton followed an economy with a 2.3% economic growth rate while Reagan had a truly abysmal economy to dig us out of. In fact, after 8 years of Clintonomics, he was only able to increase the economy by the same pathetic amount that Carter left for Reagan: .9%. And this at a time when the entire country was working their collective butts off!

Perhaps I’m being a little unfair to poor Bill. After all, he wasn’t responsible for 9/11, which by the two-year rule would fall to him. It clearly had a devastating effect on the economy. But if you look a little closer at the numbers, you’ll see that Bill’s economy was tanking long before 9/11. In the last half of 2000 (before G.W. Bush, before 9/11), the economic growth rate was .25%! Worse than even Carter. In fact, for the 4 quarters before 9/11, Clinton’s number is -.4%!! That includes three quarters of NEGATIVE growth! Obviously, I’m not being unfair at all and he should be grateful these numbers aren’t being published on a daily basis.

George W. hasn’t been in office long enough for the two-year rule to take effect. I can only say this: there hasn’t been a negative quarter of growth since 9/11. Let’s revisit this when the tax cuts kick in!!

Prime rate data: http://research.stlouisfed.org/fred/data/irates/prime

Unemployment data: www.bls.gov Click “Get Detailed Statistics” then choose “Unemployment Rate.” Select years.

Economic Growth data: http://www.bea.gov/bea/dn/gdpchg.xls