NCPA - National Center for Policy Analysis


February 11, 2009

President Obama's economic policy is following not what has been proven to work but liberal ideology.  The best way to understand this is to compare what's being proposed now with what Ronald Reagan accomplished.  In 1980, amid a seriously dysfunctional economy, Reagan campaigned for president on an economic recovery program with four specific components, says Peter Ferrara, director of entitlement and budget policy for the Institute for Policy Innovation.

The first was across-the-board reductions in tax rates to provide incentives for saving, investment, entrepreneurship and work.  The second component was deregulation to remove unnecessary costs on the economy. In today's world, that would especially mean removing the onerous restrictions on energy production -- allowing drilling offshore and onshore for oil and natural gas, revival of the nuclear power industry, and construction of more electric power plants. 

Third was the control of government spending:

  • In 1981, Reagan forced through Congress not only his famed, historic tax cuts, but also a package of budget cuts close to 5 percent of the federal budget -- equivalent to roughly $150 billion today.
  • In constant dollars, nondefense discretionary spending declined by 14.4 percent from 1981 to 1982, and by 16.8 percent from 1981 to 1983.
  • Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan's two terms.
  • By 1988, this spending was still down 14.4 percent from its 1981 level in constant dollars.

Even with the Reagan defense buildup, which helped win the Cold War, total federal spending declined to 21.2 percent of gross domestic policy in 1989 from 23.5 percent of GDP in 1983.  That's a real reduction of 10 percent in the size of government relative to the economy, says Ferrara.

The fourth component of the Reagan recovery plan was tight, anti-inflation monetary policy, which was spectacularly successful.  Inflation was cut in half to 6.2 percent in 1982 from 13.2 percent in 1980, and cut in half again to 3.2 percent in 1983.

We know such policies work because they turned around in just two years an economy far worse than today's.  We were suffering from multiyear, double-digit inflation, double-digit unemployment, double-digit interest rates, declining incomes, and rising poverty, says Ferrara. 

Source: Peter Ferrara, "Reaganomics vs. Obamanomics," Wall Street Journal, February 11, 2009.

For text:


Browse more articles on Tax and Spending Issues