The decade was the 80's. The household word was supply side economics. Supply side economics is actually a classical theorist which became the foundation of Reaganomics. The fact is, Reaganomics merely concentrated on incentives. The key point at that time was the cuts in income taxes, particularly in the marginal tax rates. The policy became effective since it spurred the economy with an enhanced supply (particularly for the people to exert more work efforts thereby promoting productivity) and consequently inspired the demand (with increased investment in plants and equipment and put muscle in research and developmental efforts).
Reagan boldly cut the average marginal income tax rate from a high 29.4% in 1981 to 21.8% in 1988. Over a seven year period, from 1982-1989, the gross domestic product grew by 4.3% at an average growth rate of about 0.6% per year.
George W Bush followed suit the inspiration provided by Reagonomics by cutting then the marginal tax rates from 24.7% in 2000 to 21.1% in 2003. The economy, particularly the GDP, grew at a respectable rate of 2.7% per year over a 4 year period from 2001- 2005. (Stats provided by Robert Barro of the Harvard School of Economics).
In contrast, the core of Obamanomics seems to be founded along Keynesian origins, since policies being implemented are those that are demand driven. The underlying objective is just the same with Reaganomics, i.e., incentives.
Case in point, the cash for clunkers. This program promoted the destruction of functional old cars and accelerated the demand or purchase of new cars. Unfortunately, this scenario drove up the prices of used cars and did not really work out well. The automobile sales increase went on a boom and later bust pattern.
Another program is the First Time Homebuyer credit which was enhanced with the Long Time Resident Credit. Were the incentives felt on a continuing basis? Yes, we witnessed temporary increase in home sales. But as I have argued in a previous article, the FTHBC was probably a failure rather than a sustainable “incentives” program inspite of. The buyers were already mind set to buy their first homes and at best the program only hastened the timing of their purchases.
Lastly, let’s look at the labor market, which is currently saddled by a national average of 10% unemployment rate and 15% in some areas, as in Las Vegas NV. This too, became an area where the demand “incentives” was instituted.
We are witnesses to the current program that unemployment insurance eligibility had been extended to 99 weeks, with the end in view that it could have the “incentives” effect. Labor Department statistics show that 57% of all people receiving unemployment benefits are already on the extended program. Experts argue that in a weak economy, extending unemployment benefits in fact “encourage” prolonged unemployment notwithstanding the fact that workers only get about 40% of their previous earning potential.
So what’s the bottom line? Well, Reaganomics is anchored in the classical economist theory, which encourages incentives that had lasting positive effects. It initially enhances productivity, and then builds up the “supply” in the economy. In the process, the enhanced supply inspires the demand in the economy. Obamanomics, on the other hand is taking the Keynesian position, which is oriented on the demand side. The programs that are being implemented lean towards pushing demand or “stimulus” in the economy. The common denominator however is just the same-incentives.
To date, the salient programs in the Obama administration are probably not that effective. The current economic advisers of this era can learn from lessons in the past and should emphasize favorable and long-lasting economic incentives. As Mr. Barro put it, “we can start by considering the extension of the tax cuts that were implemented in 2001-03 as well as reduction in the period of eligibility for unemployment insurance. “
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