Obamanomics vs. Reaganomics

Last week, for the first time in history, US debt was cut to below AAA. That wasn’t supposed to happen. For months we saw President Obama and the media pillorying conservatives for inviting Armageddon by opposing the lifting of the debt ceiling without substantive cuts in government spending. When the “Hobbits,” as the Wall Street Journal dubbed them, were undone by the squishy wing of the GOP and we had our “grand compromise,” that was supposed to avoid a downgrade.

Just as many of the Hobbits had suggested, the grand compromise did nothing to allay fears about Uncle Sam’s finances and lo and behold four days after the deal was signed Standard and Poors reacted as any respectable rating agency would and downgraded our debt. (Perhaps they were trying to repair a reputation left in tatters after the debacles of Fannie Mae and Freddie Mac.) Now the country finds itself in the same position it might have otherwise except that now we have an ineffective debt deal that will not only allow spending to grow, but will allow taxes to rise.

In what one wishes was a man bites dog moment, but isn’t, Investor’s Business Daily reports that the Obama Justice Department is forcing banks to make mortgage loans to minorities with poor credit, no job and in some cases allow them to count unemployment and welfare as income upon which to base those loans. One might charitably ask if Eric Holder has been asleep for most of the last decade. What else would explain his wanting to double down on the exact problem that caused the current financial meltdown in the first place?

Keeping with the banking theme for just a moment, there are times when something happens that simply leaves you shaking your head. The way things work in a normal universe, banks earn money by paying depositors and then in turn lending out those same funds at higher rates to borrowers. Today however, in the Bizarro world of Obamonomics, banks are actually charging big customers for the privilege of holding their deposits. Apparently, the current economic prospects in the United States are so bleak that hundreds of billions of dollars are piling up in bank vaults across the country because so little investment / borrowing demand exists. And there we are almost at the heart of Obamanomics: When government makes it more appealing to pay your bank to hold on to your money than actually invest in businesses that could potentially create profits… and jobs. The only missing piece is when the government relieves you of the burden of paying those fees by simply taking your money.

In the event that one might want disagree with the Obamanomics labeling of this economy, let’s take a look at the last time we were in this situation, back in the early 80’s. During the first thirty months of the Reagan administration, unemployment went from 7.5% to 9.4%. During the first thirty months of the Obama administration the rate went from 7.5% to today’s 9.1%. At first glance President Obama seems to measure up pretty well to the Gipper. Not so much… Ronald Reagan came to office with interest rates sitting at 20%. Thirty months later they were still at 9.5%. Barack Obama has had a slightly different playing field, enjoying almost 0% rates since he took office. At the same time, while Reagan ran deficits of 3.5% and 4.7% of GDP during his first two years, Obama has run deficits in excess of 10% of GDP for both of his first two years. Then of course there is inflation. When Reagan took over inflation was sitting at 12% and thirty months later it had dropped to 3%. Obama on the other hand took office with an inflation rate hovering around zero and today it approaches 4%.

Democrats are fond of saying that George Bush left Barack Obama with the worst economy since the Great Depression. Anyone who lived through (or read about) 20% prime mortgage interest rates or had to wait hours to fill up their tanks knows that that statement is a lie. In reality, when faced with a much more challenging environment Ronald Reagan cut taxes, trimmed the nanny state (to the degree he was able – remember he wanted to get rid of the Departments of Education and Energy but his Democrat Congress would have none of that…) and was able to set the foundation for an economic juggernaut, all while never running a deficit in excess of 6.5% of GDP... and while winning the Cold War at the same time. Barack Obama on the other hand, with a staggeringly accommodating interest rate environment and no inflation has managed to bring the economy to a virtual halt by destroying the incentive for investment. Between the massive increase in government regulation and spending as well as the takeover of whole industries, Barack Obama has dealt a body blow to the free market system in this country. All while running staggeringly high deficits and a feckless foreign policy to boot.

Reaganomics was initially coined as a term of derision by the left. Years later, after Reagan brought the country out of the dark and set the foundation for a dynamic and robust economy, the term Reaganomics became a symbol of success. My guess is that thirty years from now when historians look back on the four years of the Obama administration the term Obamanomics will still be wearing its well deserved patina of dysfunction and failure.