Did Obama really inherit an economy beyond repair?
President Obama routinely doubles down on this theme.
At the Democratic National Convention, former President Bill Clinton said that "nobody could have fixed the economy in four years." President Obama routinely doubles down on this theme, using the phrase "four years ago" to defend his policies and the current economic situation. Both Clinton and Obama frame their argument for a second Obama term by reminding voters how bad things were in 2008.
But are they correct? Was the problem unfixable in four years? Was the hole just too big, regardless of the policies they chose? The pundits will continue to debate this point for years to come, but recent history might be the most instructive. Compare what Obama inherited in 2008 to what President Ronald Reagan inherited in 1980, and let's consider the results.
The economic downturn Obama inherited from President George W. Bush was formidable, but by any objective standard, it pales in comparison to what Reagan inherited from President Jimmy Carter. On Election Day 1980, unemployment was at 7.5 percent and headed for 10.8 percent; inflation was at 12.5 percent, headed for 13.6 percent, and interest rates were at 15.5 percent, headed for 21.5 percent by Christmas, well before Reagan was sworn in.
We forget, but 1981-82 was also called "The Great Recession" and billed as the most severe since the Depression. As 1981 began, small-business people and farmers were borrowing money at 23 to 24 percent -- the highest interest rates since the Civil War. The rate of inflation was also the highest since Abraham Lincoln's day.
The decade leading up to the Reagan years had been culturally difficult as well. The 1970s featured Watergate and Richard Nixon's resignation; the Vietnam War and helicopter escapes from Saigon; the Russian invasion of Afghanistan; Iranian hostages, and gas lines. Worst of all, there was a feeling that communism was on the rise and that the Soviet Union was on the offensive. Even with 9/11 and two foreign wars, the decade of the 2000s looks manageable compared to the 1970s -- a tough 10 years for freedom and capitalism by any measure.
So, by comparison, how did things look for Obama on Election Day 2008? Not good, but not as bad as 1980. Unemployment was a 6.8 percent and rose to a height of 10 percent; inflation was at 1.1 percent and hasn't risen above 4 percent since, and interest rates were at 1 percent and have remained at historic lows (for better or for worse, the Fed is keeping the rate artificially low). Obama inherited high unemployment -- as did Reagan -- but neither heavy inflation nor high borrowing costs were a factor in 2008.
Yet the difference lies more in how they responded than in what they inherited.
First, consider what Reagan didn't do. There was no massive increase in government. No stimulus package (although he did increase defense spending, which produced jobs). And, most important, there was no blame. Those who knew Reagan well do not recall him blaming the situation on Carter. Sure, he criticized Carter on the campaign trail, but once in office, he owned the problem.
What did Reagan do instead? First, he stuck with Paul Volcker -- chairman of the Federal Reserve -- and provided political cover for Volcker to hold interest rates high in order to squeeze out inflation. It was gutsy and painful, but it had to be done in the short term.
Second, Reagan ensured passage of the Kemp-Roth tax cut, which phased in significantly lowered marginal tax rates over three years, thereby assuring predictability. To get it passed, he made calls from his sickbed after an assassination attempt. He also eased the regulatory burden on businesses, making it easier for Americans to open businesses (a strong contrast to Obama's policies).
Finally, Reagan's infectious optimism reminded people "the best is yet to come." America was still "the shining city on the hill," and Reagan reversed the country's mood from a Carter-induced "malaise" to a can-do spirit. Again, no blame game. Reagan inherited significant challenges from Carter, but just went about the business of fixing them.
As a policy result, what happened? The economy grew. Businesses expanded. Jobs were created. Interest rates dropped. And inflation was curbed. In short, Reagan's policies put our economy back on track.
As a political result, what happened? The 1982 midterm elections were tough, but not nearly as bad as 2010's were for the current administration. And unlike in 2012, the economy was in full-blown recovery mode by 1984. Reagan's reliance on private-sector solutions had worked, not just on Main Street, but also at the ballot box. In the 1984, Reagan carried 49 states (losing only Minnesota). Turns out that good policy is also good politics.
Carter lost his 1980 bid because his policies had failed to improve the economy. Reagan, on the other hand, won his second bid on the basis of organic private-sector growth. Neither scenario bodes well for Obama. History isn't perfectly predictive, but it is bound to repeat itself from time to time.
Pete Hegseth is a senior fellow at the Center of the American Experiment and was recently a Republican candidate for U.S. Senate from Minnesota. He lives in Stillwater. See his recent Wall Street Journal op-ed here.