Posted by Shyam Moondra
The 1980's defied the classical Phillips Curve of the economic theory (inverse relationship between the rate of unemployment and the rate of inflation) and had both high inflation and high unemployment. In 1980, when Ronald Reagan was elected as the president of the United States, he formulated his economic policy based on his conservative philosophy of smaller government and lower taxes or what came to be known as supply-side economics or trickle-down economics (or as his opponent in Republican primary election, George H. W. Bush, called as the "voo-doo" economics). The idea was that people could keep more of what they earned which would induce them to work harder, and that would, in turn, lead to more saving and investment, stimulating overall economic growth. While the Reagan tax cuts benefited mainly wealthier Americans, the economic theory behind the aggressive tax cuts argued that benefits would trickle down to lower-income people as well because higher investment would lead to new job opportunities and higher wages. At the same time, Reagan feared that the U. S. had neglected its military in the wake of the Vietnam War, so he pushed for big increases in defense spending. The tax cuts and increased defense spending made a big hole in the budget. Reagan mistakenly believed that huge budget deficit and sharply increased national debt will force Congress to cut non-military spending, but in a Democrat-controlled Congress that part of Reagan's economic plan never materialized and Reagan's legacy included huge budget deficit and huge national debt. It took President Bill Clinton, a Democrat, two presidential terms to balance the budget by increasing taxes on wealthy Americans, reducing growth in defense spending, and modernizing welfare programs.
Now, President Barack Obama, a Democrat, is faced with the worst economic crisis of the century with declining economic growth, increasing joblessness, and falling prices. However, Obama is relying on increased government spending and lower taxes for the middle-class, in the belief that massive new government spending will instantly create new jobs and lower taxes will induce middle-class consumers to spend more, thereby giving a big boost to the sagging economy. This trickle-up approach, which is exactly the inverse of Reagan's trickle-down approach, will bring a modest gain for low-income and middle-class people who lost considerable ground during the presidency of George W. Bush (2001-2008). However, this massive government spending and reduced tax revenues will make a bigger hole in the budget and the big Bush deficit and debt will become even more big. The Obama's calculation is that huge deficit and debt will force Democrat-controlled Congress to increase taxes on wealthy Americans and cut defense spending. Of course, Republican Reagan stood no chance of getting his proposed non-military spending cuts approved by Democrat-controlled Congress but Democrat Obama has a pretty good chance of getting his proposed tax increases on the rich passed by Democratic Congress.
So what we have is an inverse of Reagan economic policy, i.e., Obama = 1/Reagan. One could also argue that Obama is trying to accomplish what Reagan and Clinton did together, the former left a big budget deficit and Clinton turned that into a surplus by increasing taxes on the richest.
The million-dollar question that still remains to be answered is would the Obama plan lead to trickle-up prosperity or it will stifle economic growth and lead to trickle-down misery. Hopefully, the present economic crisis will provide a definitive answer to that question.
