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Remember the unemployment rate? You know, the one that once spelled certain doom for our economy, that signaled the failure of Obama’s policies?
That big, bad unemployment rate is 6.1 percent today, down from a mid-recession high of 10 percent in 2009, and lower than the rate of 7.8 percent when Obama took office in January 2009. And despite this comeback and the fact that the recession is over, there are still those who say that Obama’s policies have failed. The Republican party’s website will tell you that Obama’s stimulus bill was a “waste of taxpayer dollars.” With midterm elections just around the corner, it’s important for us to know the truth about economic growth and the policies that get us there. For decades we’ve argued about taxing and spending and the government’s role. So, who’s right?
First, what was the stimulus?
In response to the financial crash of 2008, the Obama administration proposed and signed the American Reinvestment and Recovery Act (ARRA), commonly known as the stimulus bill. To save the economy from free-fall, the $787 billion dollar stimulus cut taxes for workers, invested government money in infrastructure and construction jobs (construction for things like roads and mass transit), cut taxes and fees for small businesses and invested in education and research, among other sectors.
This massive increase in government spending reversed the trajectory of the economy at a crucial time, and yet because unemployment was so high for so long, there are still critics of the stimulus touting the you-can’t-spend-your-way-out-of-recession flag. This opposition to spending goes back all the way back to the 1980s, when President Reagan swooped in to save the country from another recession — at least that’s the myth that has been told to date. The “Reagan approach” was proudly supported by candidates in the 2012 election.
What was “Reaganomics”?
“Reaganomics,” the term for Reagan’s economic policy, is an ideology that supports lowering taxes, cutting spending and letting the free market work its magic. Reaganomics became the poster-child for “trickle-down economics” — slashing taxes and rolling back government spending on the economy — and succeeding.
But it didn’t succeed.
The problem is that even Reagan didn’t use “Reaganomics.” He started off his presidency with some big tax cuts — the top tax rate for wealthy Americans was reduced from 70 percent to 50 percent, and later all the way to 28 percent — but once the economy continued deeper into recession, Reagan’s administration realized that they couldn’t keep the cuts up forever. Tax cuts raise the government’s budget deficit, which can discourage investment and borrowing in the overall economy. In the years following the 1981-82 recession, Reagan raised taxes on the poorest Americans and closed tax loopholes for corporations. The amount of tax revenue collected under Reagan was actually slightly above the 40-year average from 1970 to 2009.
The idea of Reagan slashing government spending is also a myth — he didn’t touch major entitlement programs like Medicare, and he increased defense (and other) spending, borrowing so much money that the national debt increased from around $9 billion to over $2.5 trillion dollars. (He did, however, make cuts to other areas, like school lunch programs.) Economic recovery under Reagan was mostly thanks to his Chairman of the Federal Reserve Paul Volcker, who played a pivotal role in turning the economy around by raising interest rates. Interest rates control how much borrowers have to pay lenders back for loans, and raising rates discourages lending, so people spent less money in the overall economy; this solved the problem of the high inflation that was crippling the economy in the late 1970s and early 80s.
What has history taught us?
If Reagan got one thing right, it’s that his crazy defense spending probably helped boost the economy at the same time that low inflation rates, and thus a more valuable dollar, helped the country rebound. During the Great Depression, President Franklin Roosevelt started spending as soon as he got into office, creating government agencies that gave jobs to the unemployed, gave aid funds to states and invested in national infrastructure — not unlike Obama’s stimulus. And although taking America off the gold standard probably played a role in saving the economy during the Great Depression, putting people back to work helped them regain their buying power, thus raising consumer confidence in the economy and allowing businesses to profit again.
Ironically, we still have to spend more.
Admittedly, a 6.1 percent unemployment rate still leaves some work to be done. “Full” employment is defined as 4 to 5 percent unemployment, so we have a long way to go until we have a truly healthy economy. More stimulus spending is imperative, especially as inflation and interest rates have been low throughout recent years.
Going forward, we need to remember that the Reagan method of cutting taxes for the wealthy at the expense of poor and middle-class Americans irresponsibly quickened the rise of income inequality in our country, and put more burden on those least able to afford it. Cutting taxes to save an economic free fall is acceptable, but once the economy is stable (as it is now), we need to raise taxes on the wealthy Americans that can handle the increase, as Obama proposed in 2011. We’ve been bringing in less in tax revenue as a percentage of GDP (Gross Domestic Product, or the total measurement of our economy) in the last decade than Reagan did in the 80s. If that alarms you, it should.
The stimulus has proved that strategic spending boosts economies: states that received more stimulus funds, specifically the initial $88 billion in relief funding for state governments, fared better than those that received less.
But what about REAL unemployment?
There are still some who will complain about the “real” unemployment rate and say that because so many people have stopped looking for work, the unemployment rate should be measured at 12.6 percent to include them. But the problem with measuring economic success by that method is that we have no standard by which to measure “real” unemployment. We don’t have data on so-called real unemployment before the mid-1990s, so we cannot compare that data to, say, recessions in the 80s or the Great Depression.
The fact is that stimulus spending has put us back on the right track and prevented a full-blown depression. We cannot argue that because things aren’t perfect now, the stimulus has failed. It is estimated that we would have lost three million more jobs without it, and without the bill’s investment programs, who knows where we’d be now.
It is up to us to support, and vote for, politicians that aren’t telling the debunked old tale that you have to cut spending in order to fix an economy. Time has told us again and again: recessions require spending. What we need today is more of the smart spending we’ve seen in the last few years.
Contact CU Independent Assistant Opinion Section Editor Ellis Arnold at ellis.arnold@colorado.edu.
