Analysis of Economic Policies: Reaganomics versus Obamanomics - Example

Reaganomics vs. Obamanomics Introduction Every government comes into power having sold its policies. These policies are the fundamental ingredients of selection into power, since people analyze whether these polices will make their economic, social, and political lives be better. In a powerful democracies like the United States, the political freedom has allowed the emergence of critics, especially economic critics be a sensitive matter worth being looked at. However, in matters concerning economic policies, the reality of the economic cycles looms the minds of the contenders remarkably, otherwise they reveal some sense of economic illiteracy. The Reaganomics and the Obamanomics are some of the economic policies that have some similarities and differences that are critical for economic analysis. According to the Obamanomics, the lower tax rates before caused the 2007-2008 economic crises, thus a higher tax rate would fix the fiscal cliff. On the other hand, in regards to Reaganomics, the Cut tax rates to restore incentives for economic growth, which was implemented first with a reduction in the top income tax rate of 70% down to 50%, and then a 25% across-the-board reduction in income tax rates for everyone (Ringer, 2010). This paper analyzes the Reaganomics vs. Obamanomics, going over the recessions each inherited and the ways in which each went about tackling them. Analysis The two polices, Reaganomics and Obamanomics, were completely opposite policies to each other in their intentions as the Reaganomics was based on starting a tax polices lower than it were before. The Obamanomics on the other hand intended to increase the tax policies to a higher level than the Reagan era. According to Gingrich & DeSantis (2011), the Reagan recovery averaged 7.1% economic growth over the first seven quarters. However, the Obama recovery has produced less than half that at 2.8%, with the last quarter at a lower rate of 1.8%.  After seven quarters of the Reagan recovery, unemployment had fallen by 3.3% points from its peak to 7.5%, with only 18% unemployed long-term for 27 weeks or more.  After seven quarters of the Obama recovery, unemployment has fallen only 1.3 percentage points from its peak, with a postwar record 45% long-term unemployed. The Laffer curve below illustrates the relationship between the tax rate, tax revenue, and the taxable income. According to the curve, the tax rates has a significant impact on the revenue generated, and explain generation of additional revenue as people respond in manners that reduce the taxable income (Ringer, 2010). The Laffer curve below illustrates the recovery patter of a tax rate and cuts on federal spending. The revenue increment moves acutely in proportion with increasing tax rate and reaches an optimum point. The revenue maximizing point at the point of optimum is at the point when the economy is benefiting fully from its tax rate policy. Thus, the Laffer curve simply illustrates the tradeoff between tax rates and the total tax revenues actually collected by the government. According to the chart below, the Laffer curve shows the movement of labor taxation against capital taxation of the United States vs. 14 other European Nations. As illustrated in the curves, higher taxes are good as they induce higher tax revenue, yet after the optimum point of revenue maximization, they become detrimental to the economy. According to the curves below, neither the U.S. nor E.U. nations are at the revenue-maximizing point. Adopted from Forbes, 2013 Analysis of the Reaganomics Ronald Reagan assumed power in 1981 but his polices, Reaganomics, began in 1982. Reaganomics was partially based on the principles of supply-side economics and the trickle-down theory. According to this polices, decreases in taxes, especially for corporations, is the best way to stimulate economic growth. According to Gingrich & DeSantis (2011), the policies aimed at reducing the corporations’ expenses, so that the savings would "trickle down" to the rest of the economy, spurring growth. As stated by Hankel & Isaak (2011), the Reaganomics was attributed by four features: reduced spending, reduced taxes, reduced government regulation, and a tight money supply in order to reduce inflation. The anti-inflation monetary policy restraining money supply growth compared to demand, maintained a stronger, more stable dollar value. Within these four main features, the tax rates were cut so that the incentives for economic growth would be restored. The taxes were reduced in the top income tax rate from 70% to 50%. In fact, Reagan’s policies caused a very significant sharp upturn in job creation in the long run. The spending cuts as one of the main pillars of The Reagan government increased to 31 billion by 1981. A lot of the spending cuts, as argued by Hankel & Isaak (2011) came from federal budget and also from the defense budget. By doing so, the deficit was also decreased dramatically. In essence, the policy reduced inflation and maintained it very low due to the constricting money supply, a move which did not cause the anticipated negative effect of unemployment. According to Michel & Nazneen (2012, p 1120) the spending reductions, included the $31 billion cut in spending in 1981, close to 5% of the federal budget then, or the equivalent of about $175 billion in spending cuts for the year today.  In constant dollars, nondefense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983 (Ferrara, 2011).  Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms!  Total federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989.  That’s a real reduction in the size of government relative to the economy of 10%. As argued above, the employment rate increased as job creation moved drastically high. In addition, the reduction in the marginal tax rates was carefully done as illustrated by a small decline in the federal revenue. Analysis of the Obamanomics Barack Obama came to power in 2009 after and during a period of tuff economic cycle, considering it was after the infamous 2007-2008 economic crises. The Obamanomics policy involves all the President Obama’s polices and the proposal (philosophy) of redistributing wealth, where the wealthy and rich must pay their fair share of taxes. The major feature of the Obamanomics is his tight insistence on taxes being higher for the rich/wealthy in order to create a more tax break in favor of the majority middle class. In essence, the policy also involved heavy increase on federal spending, and Medicare payroll tax increased by 62%. In his first 2 years in office: increased federal spending by 28% and 2012 budget proposes to increase it by another 57% by 2021 (Ferrara, 2011). Obamanomics policy also involved creation of more jobs to the many jobless Americans through the provisions such as increment of the minimum wage, and introduction of new American jobs tax credits. The jobs tax credit is a temporary credit in tax for companies that add new jobs in the United States. On the same note, this policy was attached by its address of income inequality which was a major concern at the time, 2009, in America. Amidst all these positive economic philosophies of the Obamanomics, the unemployment rate increased so high by the beginning of 2014, where about 102 million people were jobless, and over 347,000 people abandoned their workplaces. Basically, as argued by Ferrara (2011), more than 4 times the amount of the unemployed during the period versus the amount of job created was realized. In addition, the Obamanomics era has been largely characterized by its aim to end income inequality. As the taxes are increased by 600 million as stated by Michel & Nazneen (p 1122), within the 10 year period, revenue is most likely to increase. But the high spending, especially from the federal spending, will have detrimental effects to the economy in the long run. In the first 5 terms of the Obamanomics, deficit has been noted to decrease significantly. Contrasts The monetary policy of the Obamanomics is exactly the opposite of the Reaganomics in the sense that instead of tightening the money supply so that it can be matched with the demand for a stable dollar, and in essence trimming the historic inflation, the opposite happens. There are the QE1 and the QE2, with a steady collapsing dollar, thereby creating a historic inflation. One of the main pillars of the Obamanomics for the last recession was to reinvigorate the economy by passing the ARRA and other policies over the next four years. This is where the infamous ObamaCare was introduced in order to regulate the health care market, Dodd-Frank to regulate banks, Cash for Clunkers and extending unemployment benefits that collectively increased economic uncertainty and reduced incentives to hire and work. This was a sharp contrast with the Reaganomics that aimed at increasing the incentives for hiring more people thus, creating a lot of jobs (Ferrara, 2011). According to the Reaganomics, the reduced tax rate system was cutting across all the classes of people in America. However, the Obamanomics introduced a tax system like the middle class families income taxes cut. No family making less than 250,000 would see an increase in taxes. Single people income over 32,000, taxes would increase from 25% to 28%. In addition, the Obamanomics have proposed a tax plan which includes tax credits to lower the amount of taxes paid. It is argued that the typical middle-class family would receive over $1,000 in tax relief, with tax payments that are 20% lower than they faced under President Ronald Reagan (Ferrara, 2011). The graph below, adopted from The Federal Reserve Bank Mineap, shows a contrasting pattern of the Reaganomics and Obamanomics dealing with recession. The chart above shows that the GDP recovery was powerful during the Reaganomics that the Obamanomics during the economic recessionary period (Ferrara, 2011). As shown in the chart below, the comparison of the growth of the U.S. economy (GDP) under the Reagan and Obama post-recession periods reveal a contrasting pattern in either case. The Reagan era was marked by a vibrant economic period than the Obama era. The chart below suggests a lagging recovery pattern by the Obamanomics. Similarities One of the main similarities of the policies is that they were both adopted at the time when the American economy was in collapse. Both policies were then applied as remedies of the situations then. During the Reaganomics era, there was a big tax cut ever, that include the reduction agenda of the deregulation, monetary restraints, a tight control on spending. In the same manner, the Obamanomics policies led to the $1 trillion spending stimulus. Just like today when people argue of the gloomy economic situation in America, the GDP of the U.S. was soaring during the third year of Reagan in office. The growth rate was 5% moving towards 8%. In the 1983 and 84, output was higher than demand and it was feared that this would offset the market equilibrium and ruin the U.S. market conditions in the world market. In like manner, during 2011, the U.S. economy lagged to the depth of barely 1% growth rate and showed signs of even going lower. The macroeconomic policies applied during these eras may not make sense to many economists and interested parties, yet, as argued by the neo-classical, an economic growth is best determined in the long run when all the variables have realized their projections. Conclusion In conclusion, the Reaganomic polices rested on the four main pillars of tax cut, deregulation, reduction in the government spending, and a stable and carefully managed growth of the money supply. The Obamanomics policy was pillared on tax increase on the rich, increased government spending, regulation, and flexible money supply. The Reagan’s policy reduced the inflation without heavy negative effects on unemployment, but lacked government regulations. Obama has pushed for income equality and increased wages and creation of incentives. In this case, therefore, it important to acknowledge the fact that the Obamanomics and Reaganomics have or were different in most issues and have certain characteristics that could be seen as beneficial to the larger American society moving positively forward. Works Cited Baumol, William J, Alan S. Blinder, and William M. Scarth. Economics: Principles and Policy. Toronto: Academic Press, 2011. Print. Ferrara, Peter. Obama And The Crash Of 2013. New York, NY: Encounter Books, 2011. Ferrea, Peter. "Reaganomics vs. Obamanomics." Wall Street Journal - Eastern Edition 11 Feb. 2009: A17. Business Source Complete. Web. 3 Dec. 2014. Gingrich, Newt, and Joe DeSantis. To Save America : Stopping Obamas Secular-Socialist Machine. Washington, D.C.: Regnery Pub, 2011. Hankel, Wilhelm, and Robert A. Isaak. Brave New World Economy : Global Finance Threatens Our Future. Hoboken, New Jersey: Wiley, 2011. Michel, Norbert, and Nazneen, Ahmad. "Consumer Response To Child Tax Credit." Empirical Economics 43.3 (2012): 1199-1214. OBrien, Ruth, and Thomas Byrne Edsall. Out Of Many, One : Obama And The Third American Political Tradition. Chicago: University of Chicago Press, 2013. Ringer, Robert J. Restoring The American Dream : The Defining Voice In The Movement For Liberty. Hoboken, N.J.: Wiley, 2010. Read More