Why Obama Is Leaving the Reagan Era Behind When It Comes to Economic Policy

When Ronald Reagan took office in 1981, he, too, referred to the fiscal crisis he inherited as "the worst economic mess since the Great Depression." After several years of sagging productivity and deteriorating confidence, millions of workers were unable to find jobs. The unemployment rate, climbing past 7 percent, was almost exactly the same as it was when Barack Obama was sworn in. Economists were fretting about the long-term consequences of the soaring national debt, then approaching $1 trillion.

While there was no Wall Street meltdown or housing crisis to confront, the Reagan-era economy, teetering on the brink of recession, was beset by another seemingly insurmountable problem: out-of-control inflation, which was making it difficult for workers to pay for goods and services. "If we get the economy in shape, we're going to be able to do a lot of things," Reagan wrote to a friend after defeating Jimmy Carter. "If we don't, we're not going to be able to do anything."

As similar as the economic challenges facing Reagan and Obama may sound, the fiscal solutions proposed by the two presidents could not be more different. In his first 100 days, Obama has gone on a Keynesian spending spree, raising taxes on the highest-income earners and pouring money into energy, healthcare, and a massive stimulus bill. Reagan took the opposite path during his first few months in office, pushing through the biggest tax cuts in history, while massively increasing the defense budget.

Mixed legacy. Politicians have been arguing ever since about which approach works better. Some pundits heralded Obama's election as the end of the "Reagan era," viewing his victory as a firm repudiation of Reagan's most recent disciple, George W. Bush. But it seems clear, after several months of bitter partisan politics, that the book is not closed on Reaganomics. "It's time for Washington to stop spending away our children's future," Jim DeMint, a Republican senator from South Carolina, said in a typical response to Obama's budget. Republicans in Congress suggested a Reaganesque array of tax cuts, instead.

This lingering faith in trickle-down economics puzzles many historians, since Reagan's approach has had a decidedly mixed legacy. While Reagan's tax cuts may have helped pull the economy out of recession, they did not achieve most of their stated goals, and the huge deficits they caused contributed to the next crisis. "A lot of the time, we wish we had a clear score card with presidents, but we don't; we have a messy score card," says Julian Zelizer, a professor of history at Princeton. "That's definitely the case with Reagan."

When Reagan arrived in office in 1981, he certainly didn't believe his economic policies might someday be viewed with such skepticism. At the beginning of his first term, he was determined not just to get the economy back on track but to drastically reduce the size of the federal government. After taxes were cut, he predicted, economic activity would increase so much that tax revenues would go up, allowing the government to pay down the deficit—a radical new theory known as supply-side economics.

With the help of conservative Democrats in control of the House, Reagan got his way, pushing a plan through Congress to cut the highest marginal tax rate from 70 percent to 50 percent and, over the next five years, all the way down to 28 percent. Reagan never made an equally substantive effort to cut spending, though, and when Congress approved several massive increases in the defense budget, huge deficits appeared. Only a month after Reagan signed his tax cuts into law, the economy slid into recession.

Many historians give Reagan high marks for the early stages of his economic recovery program, though his tax policy is not what receives the most praise. One of Reagan's top priorities when he arrived in Washington was bringing down inflation, then averaging 12.5 percent. He stoically backed the efforts of Paul Volcker, the newly appointed chairman of the Federal Reserve, to whittle away at soaring prices by restricting the money supply. But there was a steep political price to pay for this support. Fewer dollars circulating in the economy pushed unemployment past 10 percent in 1982, and as more workers lost their jobs, Reagan's popularity nosedived. After 16 months of recession, Reagan's approval rating had fallen from 68 percent to 35 percent.