Reagan: President Ronald Reagan, born 100 years ago on February 6, was markedly more successful at creating jobs than the current administration. US nonfarm payrolls have risen only 930,000 in the 15 months since unemployment peaked in October 2009. In the same period after the November 1982 jobless peak, the US economy created 4.7 million jobs. Tax cuts helped, but Paul Volcker’s much higher interest rates had a lot to do with it, too.
Large federal budget deficits characterise both periods, although they peaked at 6.3 per cent of GDP in 1983 compared to around 10 per cent today. The initial causes of the deficits were different: in the early 1980s, a defense build-up was accompanied by a big tax cut. However, 1982 legislation reversed much of the 1981 tax cut. And this past December, Congress cut payroll taxes and extended George W. Bush’s tax reductions. That brought fiscal policies from the two eras closer into line.
Monetary policy, though, presents a stark contrast. In the early 1980s Volcker, the then Federal Reserve chairman, was fighting previously rampant inflation with high interest rates. He kept them well above inflation, and the real fed funds rate - the interest rate net of the inflation rate - exceeded 10 per cent in 1982.
Ben Bernanke, the present-day Fed chairman, is fighting a different battle against a second economic downturn and deflation. His tactic has been to keep interest rates extremely low in the hope of boosting growth.
Standard economic theory balances the two key inputs of capital and labor. Volcker made capital relatively expensive; Bernanke is making it relatively cheap. One effect can be seen in labor productivity statistics. Productivity growth averaged 1.2 per cent annually in 1979-84. It has been running at double that level in the past five years. Simply put, Volcker’s policies led employers to hire more people, while Bernanke’s encourage greater use of capital plus efforts to squeeze more out of existing employees. Reagan in 1984 campaigned for a second term using the slogan “Morning in America.” That relied largely on the massive job creation of the previous two years. By this analysis, Bernanke’s loose money policies may give President Barack Obama only a fairly feeble job-creation dawn to crow about.