A Tale of Two Election Year Recoveries
The late President Ronald Reagan looms large over this year’s Presidential election. GOP candidates invoke him as the visionary who revived a flattened economy with lower taxes, easier regulations, and smaller government. That’s what the economy needs today to bring back the growth of the 1980s, say his acolytes. Yet the Republican argument leaves out one important factor: President Barack Obama’s recession is a lot more complicated than the one Reagan tussled with in 1981.
Superficially, their predicaments are similar. Both presided over economic downturns considered to be the worst since the Great Depression. They lost congressional support in midterm elections and were presiding over economic recoveries as they geared up for reelection campaigns.
Now the differences. The economy surged under Reagan. Gross domestic product in the final three months of 1983 rose at an annualized 8.5 percent. For Obama, the economic engine is running much more slowly. He narrowly avoided a double-dip recession in mid-2011, and growth accelerated in the fourth quarter to a 2.8 percent rate—the fastest the country experienced in 18 months. The unemployment rate in December 2011 was 8.5 percent, vs. 8.3 percent in December 1983. Yet joblessness 29 years ago dropped 2.5 percentage points in just 12 months, compared with a decline of less than 1 percentage point in 2011.
Obama has struggled to master a far more complex situation. The Reagan recession was sparked by the high inflation of the Jimmy Carter years and the decision by then-Federal Reserve Chairman Paul Volcker to raise interest rates to as high as 20 percent in May 1981 to smother higher prices. Although the high rates caused a lot of pain, they left Volcker with plenty of room to cut until the recession had eased. Rate cuts started in June 1981. By December 1982, rates were down to 8.5 percent. The economy responded quickly to monetary easing. Fed Chairman Ben Bernanke, in contrast, has little room left for cuts; the federal funds rate is close to zero. “When you have a deep financial crisis paired with recession, it’s a completely different animal than a normal recession,” says Kenneth Rogoff, an economics professor at Harvard University. “The one in the Reagan Administration was a more normal one.”
The presence of so much debt in the economy makes companies and consumers reluctant to borrow and banks reluctant to lend, no matter how low interest rates go. Debt today remains a greater drag on the U.S. than in 1983, says Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington and co-author, with Rogoff, of This Time Is Different: Eight Centuries of Financial Folly. In the third quarter of 2011, household debt was 86 percent of GDP, compared with 47 percent in the third quarter of 1983, according to the U.S. Commerce Dept. “The capacity for households to be the engine of growth that they have been in past recoveries is simply not there,” Reinhart says.
Americans in 1983 borrowed readily to buy a home, despite double-digit mortgage rates. The runup in home prices had started in the 1970s, and buying a house seemed like a sound investment. Purchases of previously owned single-family homes in December 1983 were up 23 percent from the year before, according to the Washington-based National Association of Realtors. Housing was a strong part of the Reagan recovery, says Neal Soss, chief economist at Credit Suisse in New York and an assistant to Volcker at the Fed. “You added a lot of construction jobs that you aren’t adding now,” he says. Last month, year-over-year home sales rose just 4.3 percent.
Obama has worked with an economy that was weak even before the recession officially started in December 2007. The expansion that started in late 2001 under President George W. Bush was among the most lackluster in modern U.S. history, providing little cushion against a possible downturn. By the start of the recession in December 2007, payrolls had grown less than 6 percent during the decade that started in 2000. Payrolls grew 20 percent during the 1980s and 1990s and 27 percent during the 1970s. A lot of work could be found in defense, a sector Reagan expanded: Defense spending rose from 4.9 percent of GDP in 1980 to 6.1 percent in 1983.
Many of the jobs generated during the Reagan recovery were well-paid factory work. Although Billy Joel was lamenting the decline of Industrial America in his 1982 hit Allentown, manufacturers maintained considerable might in 1983 and 1984: At the end of 1983, almost a fifth of working Americans—19 percent—labored in manufacturing. Fewer than 9 percent of workers do today. “Back then a larger fraction of the workforce was in manufacturing,” says Soss. “And you hire those people back when business gets better. There’s less of that going on now.”
“Reagan could talk about morning in America and could come from that perspective,” says Peter D. Hart, who was a pollster for Walter Mondale, Reagan’s Democratic opponent in 1984. “The major difference this time is that Americans are much more likely to believe we are in a long-term decline.” Reagan, too, might have to struggle to convince voters it’s morning in America in 2012.