There’s an op-ed in The Wall Street Journal today by Phil Gramm and Glen Hubbard that’s getting some attention and is worth a moment’s consideration. It’s behind a paywall so I can’t link, but it’s basically an attack on Obama that compares (unfavorably, of course) how we’ve responded to the recent recession versus how we responded in 1981-82, when the great Reagan was at the helm and America was America.
David Frum already made cogent criticisms of the argument on his blog:
Here are two of the smartest men on the economic right, one a former chairman of the Senate banking committee, the other a former chair of the Council of Economic Advisers.
Yet they insist on treating today's economic crisis as a repeat of 1979-81—and Europe's agony as a debt crisis (which it isn't), not a currency crisis (which it is).
Why? Well you will consider only one policy solution—cut taxes and regulations—then you must insist that there can be only one policy problem.
Yet in almost every way, today's economic problems are exactly the opposite of those of 30 years ago. Then we had inflation, today we are struggling against deflation. Then we had weak corporate profits, today corporations are more profitable than ever. Then we had slow productivity growth, today it is high. Then the top individual income-tax rate was 70%. Today it is 36%. Then energy regulations produced energy shortages. Today the removal of banking regulations has produced an abundance of debt.
There are still other points to be made. The earlier recession was certainly severe, but even so, considerably less severe than our recent one. In the 80s, GDP fell by 2.6 percent. In the aughts, GDP fell by 5.1 percent, nearly twice as much. Employment contracted by about 3.1 percent in the 80s, versus 5.4 percent during the Great Recession (and it fell another 1 percent or so after the recession ended in June 2009, bottoming in February 2010). It was also two months longer. It is true that unemployment got almost as high in the 80s as it did recently, but not as high. But by nearly any reasonable measure the recent recession was strikingly worse.
It can also be argued that the 81-82 recession was, in a sense, simpler. It happened largely because Paul Volcker had pushed up interest rates so high to fight then-rampant inflation (as Frum notes). So the answer was sort of easy: lower interest rates. The recent recession, on the other hand, was caused by the housing bubble and quickly spread to other sectors and across the world and was a far hairier beast.
And finally, there is also a political argument against Gramm and Hubbard, and this is something Gramm surely knows about because he was in the thick of the action back then—the big 1981 Budget Reconciliation Act was known as Gramm-Latta II, for Gramm and an Ohio Republican named Del Latta. And the political argument is that in 1981-82, the opposition party wasn’t united in its desire to prevent the president from having anything he could call a political victory and wasn’t dedicated to ensuring that the president fail.
On June 25, 1981, the Senate voted to pass the Reagan budget (see page 10 of 76 for vote tallies). The vote was 80-15, with 28 Democrats in support. The House passed it the next day by 232-193, with 29 Democrats in support. Compare that to the GOP support levels for Obama’s stimulus, which were three in the Senate and zero in the House.
To be sure, there was plenty of Democratic caterwauling about the Reagan budget. Politics, and differences of opinion, existed. But even so, substantial numbers of Democrats (especially in the Senate) ended up backing Reagan’s budget. And they did more than vote for it. They negotiated it for weeks. They actually talked with their Republican counterparts about what should be in the bill, negotiated all kinds of complex Medicare and Medicaid reimbursement rates and any number of things. And remember, Democrats controlled the House then, so they could have just blocked the whole business if they’d wanted to. But they didn’t. They legislated. They did—you know—their jobs.
Granted, this criticism doesn’t get to the substantive differences between Reagan’s response and Obama’s response. But, as Frum implies, you have to be a pure ideologue to think that what worked in 1981 would work in 2009 with a completely different and more complex set of problems.
My main criticism here is about the politics. If the Democrats under Tip O’Neill had behaved as today’s Republicans behave, they’d simply have blocked the Reagan budget, never let it come to the floor, let the country go to hell and let Reagan take the blame. That’s exactly what Republicans did. It may seem quaint, but they are legislators, and it was actually their job to help pull the country back from the brink—which, remember, they were willing to do as long as Bush was president.
Put it like this. In 1981, the house was on fire. Democrats did a lot of finger-pointing, but at the end of the day, enough of them did help unfurl the hose. In 2009, the house was ablaze again, and the fire was more intense. And Republicans went down to the basement, turned the water off at its source, and sat back hoping to see the flames spread.