New Deal vs. Reaganomics vs. Obamanomics

Essay by Kendra Logan
4.1.11

Since the 1930s, there have been twelve different presidents and at least as many ideas on how to run the country. One of the most important aspects of the United States is the economy, and as such how to handle it has been a controversial subject from the beginning. When the Great Depression struck in the 1930s, the economy game became more of a priority than ever before. Since the Depression, three presidents have made, or are making, very distinct economic eras for themselves: Franklin Delano Roosevelt and his New Deal; Ronald Reagan and his supply-side-based Reaganomics; and currently, Barak Obama’s socialistic Obamanomics. Each of these economic philosophies impacted Americans and the free market in different ways, but the long term effects of each plan were almost always unforeseen.

In 1933, Franklin Delano Roosevelt took office as the 32nd president of the United States. He came into office promising to help America recover from the Great Depression. However, he did not have a clear plan of action, and often reacted quickly with whatever seemed best at the time. His three main philosophies of leadership were that the government should do more for the people, the government should spend in order to stimulate the economy, and the American people should be made happy.

At the time, people welcomed these patterns of thought. Americans were largely unaware of what caused the Great Depression and were eager for anyone to step in and take responsibility for helping them. This fit nicely with FDR’s socialistic goals for the nation. As he ran for term after term, FDR expanded the government at a rate never seen before, stepping in and taking over jobs people had always done for themselves. He embraced Keynesian economic policies, which state that they way to stimulate the economy is for the government to spend more. This made him increasingly popular because he helped Americans very publicly, regardless of whether or not it would be beneficial in the long run. FDR depended on feelings more than any other president, using fireside chats to approach families in a warm and friendly way. FDR’s almost four presidential terms amounted to years of increased government involvement and an alphabet soup of new programs.

Beginning with his inaugural address, FDR promised a profound change for America. Even today, it is somewhat difficult to understand FDR’s plan in an organized way. Most historians organize his plan into three parts: relief, recovery and reform and/or into his First New Deal and Second New Deal.

Roosevelt’s First New Deal dealt with groups of people, such as banking and farming. Only the day after his inauguration, Congress passed the Emergency Banking Act, part of FDR’s reform agenda. This act declared a “bank holiday” for one hundred days while the banks were evaluated. They were not allowed to reopen until FDR was satisfied with their performance. By the end of 1933, over four thousand small banks were permanently closed.

Another result of the First New Deal was the Agricultural Adjustment Administration. With new machines being invented, farmers were doing well and producing more than ever, which resulted in overproduction and therefore lower prices. Instead of allowing the free market to even things out, FDR determined that it was the government’s job to fix things. The Agricultural Adjustment Administration restricted farm output by paying farmers not to produce. In the one small area of farm overproduction, this made some sense. However, when looking at the big picture, it was obvious that restricting the production of food was foolish. Farmers were being paid not to grow food at the same time that people were standing starving in soup kitchens. Farm income did go up as FDR planned, but not according to plan. Farm income rose because the farmers took the government subsidies while keeping their production rate at the same level. The government wasted American tax dollars on an unnecessary project that was not even executed correctly.

This type of intense government involvement sprang from the philosophies of John Maynard Keynes, a leading British economist. Keynes declared that the only way for an economy to flourish was for the government to control it and spend large amounts. FDR, and many other leading economists, embraced this philosophy, disregarding the fact that Europe’s attempt at a Keynesian economy had failed miserably. Instead of allowing capitalism to run its course, FDR insisted that government spending was the way to go.

One way that FDR saw the government grow and spend was with the creation of thousands of government-paid jobs. This part of FDR’s First New Deal began on March 9, 1933, when Congress passed a series of bills dealing with the unemployment rate. At that time, a record-breaking 25% of the population was unemployed. The special session of Congress where these bills were passed is known as the Hundred Days. Through the new bills, FDR put into play his main philosophy: the government should expand to take care of everything. His solution to unemployment was direct recruitment. People were paid to do inconsequential jobs that ultimately created more problems. Men were hired to build schools, but then towns were left with finding teachers, supplies, and funding for the schools. As a result, as new schools were build, existing schools closed at record rates. FDR seemed to lack confidence in the American people. He failed to realize that if a job was needed, someone in the private sector would pay to have it done! For the economy to truly recover, Roosevelt should have allowed money to stay in the private sector instead of draining it via taxes. Had he done this, jobs would have been created by citizens instead of the government, giving people both jobs and areas in which to exercise creativity and ingenuity.

Although FDR did appear to want to help the nation, there were political goals in play as well. Had he left the creation of jobs to the people, the economy would have fared better in the long-run, but his popularity would have suffered in the short run. FDR was always intent on making his good deeds public so that the American people would see that the government was “doing something” for them. With increased government dependency, it would become more likely for Democrats, or even FDR himself to dominate the government.

With FDR’s Second New Deal, programs and administrations sprang up left and right, totaling at least one hundred by the end of FDR’s presidency. This explosion of agencies and acronyms is referred to as an “alphabet soup” era. While the short term effects of the programs can be seen as helpful in some cases, the long term consequences suggest they were not wise investments.

The Agricultural Adjustment Act, mentioned earlier, was created to control the production of farm goods and raise prices by offering subsidies. Farm income did rise, but only because farmers ignored the government’s orders and kept up production rates while accepting the subsidies. This act, while not even executed properly, raised prices for starving consumers and was even found unconstitutional in 1936. In 1995, Congress found agricultural subsidies to be inefficient and discontinued it.

Another act of FDR, the Tennessee Valley Authority Act, was meant to provide government-subsidized electric power to private citizens. However the act only increased government involvement in the private sector and created monopolies in electric power.

In 1934, the Federal Deposit Insurance Corporation was founded to insure bank deposits up to $5000. It succeeded in that, and also encouraged risky investments, costing the government a total of $800 billion.

It is difficult to find anything beneficial about the Revenue Act of 1935. It was put in place to offset huge federal deficits by raising taxes across the board. This accelerated notions of the redistribution of wealth, causing progressives to target upper class citizens. The act did not offset deficits in the least. Instead, it cemented the rich’s practice of moving business overseas to avoid taxation. This, as usual, left the middle and lower class citizens to bear the brunt of the new taxes.

Social Security was also passed in 1935. It was intended to provide old-age pensions, unemployment compensation, and aid to families with dependent children, specifically in the cases of single mothers. The latter portion of Social Security caused a huge rise in illegitimacy by encouraging couples not to marry. Today the system demands higher taxes while giving fewer benefits and is now predicted to be bankrupt by 2020.

One of the most famous programs of the time, the Works Progress Administration, or WPA (nicknamed We Piddle Around), created 9 million public jobs such as the construction of bridges, theaters, sidewalks and other projects. This administration damaged the overall economy and catered to the elites. It was ended in 1943 during World War II.

In 1938, the Fair Labor Standards Act passed. This program set minimum wages and maximum hours that could be worked. It raised the cost of employment such that companies could no longer afford to hire as many workers, raising the unemployment levels. New studies suggest that the act may even have prolonged the Depression.

In the long run, FDR’s 13 years in office represent some of the least economically beneficial in history. Though he achieved nearly everything he wanted, none of his agencies worked the way they should have, and most of them damaged the economy overall. FDR’s years of feel-good fireside chats, growing government and Keynesian spend-crazy policies set America on an unfortunate course that would not be turned around for years.

When Ronald Reagan was elected in 1981, he faced an America that was in economic turmoil. The aftermath of World War II left American industry struggling to survive and compete internationally. The recent restrictions and regulations on everything from car exhaust to well-digging virtually stamped out American creativity and contributed to the economic downward spiral. Reagan came into the presidency promising to reduce government, lower taxes and free people from restrictive regulations.

Those three goals can be seen as different facets of one philosophy: supply-side economics. For years, economists had sworn by the tried-and-failed Keynesian economic philosophy. Reagan knew it was not working and decided to rely on simple common sense, which pointed to supply-side economics. The term “supply-side economics” was first used by Nixon’s economic advisor, Herbert Stein. This simple philosophy states that true economic growth occurs when the barriers for people to produce are removed. For Reagan this included lowering taxes and chipping away at the bureaucracy the government had become. Reagan had confidence that if some of the stifling restrictions were removed, the American people could work their way out of any dark place.

Reagan’s first order of business was a 30 percent, across-the-board tax cut, meaning taxes for everyone— not only the lower classes—would be reduced. However, Congress did not want to cut the taxes all at once and passed the Economic Recovery Act in 1981. This act staged 5, 10, and 10 percent tax cuts over a period of three years. Congress said that an across-the-board cut might give the impression of favoring the rich, but it would be naïve to say Congress was not also afraid of having less money coming in. The reality, as Reagan argued it, is that tax cuts pay for themselves. When taxes are lowered, business owners bring their companies back from overseas, subjecting themselves to taxation. Not once in the years following the cuts did revenue decline. The government actually took in five times more revenue. Unfortunately, Congress’s staggering of tax cuts lessened the dramatic impact Reagan had hoped for, but nothing could make this brilliant idea completely void.

Reagan further demonstrated his passion for allowing people freedom by being the only administration not to raise minimum wage. Reagan had confidence that the people could come to reasonable employments without the government telling them what to do. Reagan believed in stimulating producers with tax cuts and greater freedom rather than stimulating the consumers. This philosophy is sometimes referred to as “trickle-down economics” in that success starts at the top and spreads to lower class citizens. This is not entirely accurate, as Reagan’s first major act was to cut taxes for everyone. However, “trickle-down economics” could actually make sense. If a citizen, even an upper class one, experiences success, he will then be able to buy more, invest more, and hire more, thereby stimulating the economy. Freeing the upper classes also encourages lower class citizens to succeed. On the contrary, if a system benefited only lower class citizens, upper class citizens have no incentive to stay successful.

Besides cutting taxes and removing restrictions, Reagan cut back on government spending, just as he had done as governor of California. The Department of Transportation, an agency that had imposed unrealistic restrictions on vehicles since 1967, was forced to slow down its creation of new regulations. Secretary James G. Watt, who had been a key leader in the Sagebrush Rebellion against the Environmental Protection Agency, aided Reagan in cutting back on overbearing government agencies. Watt helped to shrink the Environmental Protection Agency by opening up public land and water to development and helping to remove other restrictions on private land. As well as cutting back agencies, Reagan cut back on the government itself, forcing staff and service cuts in almost all departments.

Critics like to point out that the national debt rose considerably during the Reagan years. This is true. As a short-run strategy to reduce inflation, the United States borrowed domestically and abroad to cover Federal budget deficits. Reagan was also forced to elevate funds towards the Cold War, which he was determined to end. He did. Nevertheless, the crusade for lower inflation and ending the war raised the national debt from $997 billion to $2.85 trillion.

The wonderful long-term effects of Reaganomics are undeniable. However, in the short run it appeared that Reagan’s policies would were only making things worse. A steep recession began in 1981 and soon became the most severe since the Great Depression. Many blamed Reagan, but what critics were seeing was the delayed aftermath of prolonged Keynesian thinking. Even those who knew the recession was not Reagan fault complained that the government was not doing enough to fight it. People failed to realize that preventing the government from “fixing” the economy was the best thing Reagan could have done. By allowing capitalism to run its course, Reagan orchestrated the greatest economic boom the nation had seen in a long time. He knew that things needed to get worse before they got better and was not afraid to suffer brief unpopularity for long-term economic stability.

To the surprise of many, by November of 1982 the nation pulled out of the recession and surged forward at a pace never before seen. During Reagan’s presidency, 16 million jobs were created in the private sector only. The rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Reagan; the federal deficit fell from 6% of the GNP in 1983 to just over 3% in 1987. By 1988, the inflation rate had also fallen to 4.1% from its peak of 13.5% in 1980. After experiencing no growth in the pre-Reagan years, the average family income grew by $4000. Unfortunately in the years to follow Reagan, the average dropped almost $1500.

Ronald Reagan’s unwavering trust in supply-side economics, small government and the value of giving people freedom led America through eight of its brightest years. Reagan did what his senses of morality and logic told him was right, despite heated criticism. Unfortunately, in order for prosperity to last, the sound policies needed to continue. Reagan did what he could while he was in office, but modern-day politicians seem determined not to learn from his success—or FDR’s mistakes.

Barak Obama, elected in 2008, is the current president of the United States. He came into office declaring that the nation needed change and he was the one to provide it. Both are true statements that could not go together more poorly. The nation was in dire need of change, but the change Obama offers is poison in disguise. His main philosophies involve a Keynesian economic mentality, expansion of government and governmental control of the economy.

On February 17, 2009, Obama signed the American Recovery and Reinvestment Act, a $787 billion economic stimulus package aimed at helping the economy recover from the deepening worldwide recession. This package is the modern day answer to Keynesian’s government spending suggestion. Yet again, despite overwhelming failures in Keynesian economies, the philosophies of the British economist are coming back. The five stated goals of the stimulus were to 1) preserve and create jobs, 2) assist those most impacted by the recession, 3) spur technological advances in science and health, 4) invest in transportation, environmental protection, and other infrastructure, and 5) stabilize state and local government budgets.

The stimulus package, designed to create jobs and jump start the economy, includes $6 billion to turn federal buildings into “green” buildings; a $2 billion grant to FutureGen, a power plant in Illinois that was defunded last year because of inefficiency; $650 million for the DTV converter box coupon program; $248 million for furniture at the new Department of Homeland Security headquarters; and $100 million for reducing the hazard of lead-based paint. The stimulus package proposal is over 1500 pages long. Judging by the number of outrageous proposals such as these, it is obvious most people have not read it. The stimulus is hardly more than a recipe for big government and higher tax dollars.

Just a month after the stimulus package, the Federal Reserve and Treasury Department announced the Public-Private Investment Program for Legacy Assets, which contains provisions for buying up to $2 trillion in depreciated real estate assets. This is yet another example of the government stepping in to help citizens where they could potentially help themselves. Similarly, Obama authorized the renewing of loans for General Motors and Chrysler. This gave the government a 60% stake in the company. In June of 2009, Obama called on his cabinet to accelerate the investment because he was dissatisfied with the pace of the stimulus. He signed into law the Car Allowance Rebate System, more popularly known as “Cash for Clunkers.” This program was designed to provide economic incentive for citizens to purchase newer, more efficient cars. The initial $1 billion provided for this program was exhausted well before the program was scheduled to end. This prompted Congress to approve another $2 billion dollars for it.

In 2010, Obama stated than across-the-board tax cuts wouldn’t stimulate economy. After Reagan’s years, where tax cuts did wonders for the economy, that statement is almost laughable. Still, Obama has raised taxes left and right since the day he took office. He raised the tax on the top two income tax brackets from 33 percent to 36 percent, and from 35 percent 39.6 percent. He raised the capital gains tax and the tax on dividend income from 15 percent to 20 percent on married filers with incomes above $250,000.

Despite all the taxation, the national debt has risen $3 trillion during Obama’s first two years in office. Although Obama likes to blame former president Bush for the shaky economy and mounting debt, Obama’s stimulus will cost more than $100 billion, 15%, more than the entire Iraq War. Iraq War spending accounted for just 3.2% of all federal spending while it lasted, and accounted for less than a quarter of what Obama spends on Medicaid.

In the short run, Obama’s stimulus package did in fact create jobs, although the reports of how many are wildly inconsistent. However, this situation closely mirrors that of FDR’s New Deal. Jobs were created, but at what long term cost? The Congressional Budget Office itself says that Obama’s numerous bills will help in the short run, but result in so much government debt that within a few years the bills will crowd out private investment entirely. What people fail to understand is that the economy can benefit in the short run and still be frighteningly unhealthy. One can feed a child caffeine and watch his energy level skyrocket. However in time more and more caffeine will be required to keep up the effect; all the while the child becomes less healthy.

President Obama has repeatedly claimed that his budget would cut the deficit in half by the end of his term. The 2010 budget deficit was $1.3 trillion, or around 10% of the nation's gross domestic product. For 2011, the administration predicted the deficit will slightly shrink to $1.34, while the 10-year deficit will increase to $8.53 trillion or 80% of GDP. If our presidents continue to employ these unhealthy economic practices, the nation will not stay afloat for long.

One can only estimate what the long-term effects of Obama’s actions will be. However, we can learn from the past, and there are many lessons to be learned from FDR’s and Reagan’s presidencies. Before each president, Roosevelt, Reagan, and Obama, came into office, the nation was experiencing severe economic struggles. FDR and Obama reacted by increasing government involvement. FDR’s New Deal, which created at least a hundred new agencies and programs, bears similarities to Obama’s American Recovery and Reinvestment Act. Both plans involved higher taxes, Keynesian philosophy, and use of the government to control the economy. To some extent, Obama also resembles FDR in that he relies on public emotion and popularity rather than sound logic and common sense. Reagan came into the presidency faced with an economy as bleak as FDR and Obama. Yet instead of expanding the government, Reagan cut back on unnecessary programs. Instead of raising taxes, Reagan cut taxes across the board and brought in five times more tax revenue. Instead of doing what looked easy, Reagan did the hard things because he knew it would be beneficial in the long run. Although each president took office faced with economic challenges, only Reagan managed to pull the nation through with good long-term results.

Many Americans originally embraced Barak Obama’s and FDR’s big government methods of leading the country. More government involvement meant less individual responsibility, and with the nation in a recession, less responsibility sounded good to everyone. No one wanted to hear Reagan’s voice of reason saying that things had to get worse before they got better. Fortunately, Reagan had the skill to guide the nation through the tough times to sunny days on the other side. Unfortunately, all good things will come to an end unless fought for, and Keynesian philosophy, government expansion, and socialism are once again on the horizon. The economy cannot continue in this condition forever. Sooner or later, the economy and everything surrounding it will undergo a massive shift. The only question is, will the shift be orchestrated by another Reagan, or will it inevitably shake the nation against all efforts to prevent it?

~Kendra Logan