Don’t be confused by the latest numbers. Smart forecasters still predict a deep recession.
Brian S. Wesbury and Robert Stein at First Trust Portfolios have been reliable guides over recent decades. They expressed some hope for a correction over the last two years, but by mid-year they saw a serious recession coming. Not misled by a late government-reported 2.9 percent increase in gross domestic product and more jobs, they explained that about half of the increase in real GDP was due to building inventories, “which isn’t sustainable and is almost certain to slow by late 2023.”
As Thomas W. Smith Foundation’s Jim Piereson explains in The Growth Deficit, the normal real (inflation-adjusted) growth rate of the U.S. economy is 3.3 percent, which could restrict the crisis. But the Congressional Budget Office estimates that real GDP growth this year will be only 0.1 percent, and long-term growth 2.4 percent, at best.
So, there will be a serious recession. What can be done? Contrary to myth, President Franklin D. Roosevelt’s economic stimulus did not end the Great Depression of the 1930s, since it lasted a decade after he took office. In 1938, Republicans won 72 seats in the House and a blocking majority with Dixiecrats in both houses, demonstrating popular dissatisfaction. Only World War II saved FDR. After the war, with the economy still lagging, Republicans won both houses of Congress in 1946.
Reagan’s backing of Volcker was at great political cost to himself.
Is there no one to show the way out of the present recession with action rather than hope? Only four modern presidents have been ranked by one-fifth or more of Americans as those who will be judged by history as “outstanding” presidents: FDR, John F. Kennedy, Barack Obama, and Ronald Reagan. Who else could someone go to on the economy except to Reagan? For Republicans, he is more popular than President Donald Trump, and support for him keeps increasing over time.
In fact, Reagan is the only recent leader who actually controlled runaway inflation and ended a serious recession. He had actually studied theoretical solutions beforehand, especially those of Milton Friedman, who explained that “[i]nflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” In practice, Reagan gave Democratic President Jimmy Carter’s chair of the Federal Reserve, Paul Volcker, the political support he needed to keep tightening money supply growth until it tamed the raging inflation of the 1980s, with Reagan supporting even interest rates rising into double digits until a free-market balance could be restored.
Reagan’s backing of Volcker was at great political cost to himself, as the media highlighted daily the resulting high interest rates, unemployment, and inflation. As an official from that time can testify, the first question from the media, whatever the subject, concerned the terrible number of people out of work. But within a month of taking office, Reagan introduced a comprehensive plan to support Fed monetary policy. Still, as economist Judy Shelton emphasizes, the “primary thrust” of the Reagan plan “was to release the strength of the private sector and ‘rekindle the nation’s entrepreneurial instincts and creativity.’” Shelton explains:
The Reagan plan consisted of four parts: “(1) substantial reduction in the growth of federal expenditures, (2) significantly reduced federal tax rates, (3) prudent relief of federal regulatory burdens, and (4) a monetary policy on the part of the independent Federal Reserve System consistent with those policies.”
Within a week of the Reagan plan’s introduction, Volcker testified before Congress about three key priorities: the need for responsible tax-reduction stimulation, the importance of restraining inflation, and the necessity of supporting Reagan’s emphasis on cutting government spending.
And it all worked. The economy recovered in time for Reagan to be reelected overwhelmingly in 1984 and for his successor to be elected in 1988. Besides wringing out inflation, Reagan generally reduced federal spending. And the economy more or less recovered until the Great Recession of 2008.
From the mid-1980s to 2007, the United States experienced low inflation and a moderated business cycle with only minor fluctuations in gross national product and employment. But inflation had not gone away. A crisis in 2008 was triggered by renewed inflation — not directly, in the prices of consumer goods, but in stock and real estate increases. The Fed’s solution during the presidencies of George W. Bush, Barack Obama, Donald Trump, and Joe Biden was to keep rates at nearly zero and to spend multiple trillions of dollars on its own ledgers. By 2022, the Fed could no longer ignore the pent-up inflation that these policies had created and began increasing fund rates. But the hole had been dug so deep that a recession became inevitable. Politically, the 2008 failure led to two Democratic presidential terms, then Donald Trump, and then another Democratic president.
Friedman could have warned the recent presidents, but there is a more basic political problem. Many probably knew that there was a much more rapid increase in the quantity of money than in its output during their tenure that could have dire results, even recession. But Washington is a place where one succeeds politically by not upsetting the press — or the bureaucracy and clients that report to it — by not taking any action that could cause distress to voters. The safe thing is to do nothing and keep your reputation, as personnel experts advise. But good policy and reforms require the courage to take the bumps, since the necessary tough economic policies are often unpopular. This is the core problem in democratic governance: the reluctance to take the hits.
One-time journalist critic Lou Cannon ended up understanding why Reagan was so successful. He was one of the very few leaders who had the courage to stand up to the media and to popular pressure to follow the easy route and kick the can down the road. Cannon noted:
Leading Republicans, including Senate leader Howard Baker, urged Reagan to break with the Federal Reserve, but he refused to do so, believing that tight interest rates would eventually work. “Stay the course,” Reagan proclaimed over and over again. Over time, despite the human costs of the recession, the Fed’s policies did work. Tight money and reduced inflation laid the basis for a boom that began in 1983 and was still going when Reagan left the White House in 1989.
In fact, it was still going until the 2008 recession, when half steps were taken to delay things so that the recession exploded again in 2022, leaving Biden to face the music. He has tried to deflect responsibility for inflation to the Fed chair rather than support him, claiming that the economy remains sound. Indeed, Biden has been consistent in maintaining that economic stimulation — rather than reduced spending or regulatory reform — should be the primary economic solution. His multi-trillion-dollar deficit spending, proposed higher taxes, and increased regulatory burden is the opposite approach of the Reagan survival kit for long-term economic recovery.
That leaves Republicans with control of only one house in Congress, and that only by a slim margin. What can they possibly do? They can first explain what Reagan did to fix a similar inflationary recession and begin trying both to cut the current excessive discretionary spending and to eliminate the mass of regulations that do not work — and they are legion. Then, they can promise to fix the rest when they gain the presidency and Congress in 2025.
Donald Devine is senior scholar at the Fund for American Studies. He is the author of The Enduring Tension: Capitalism and the Moral Order, from Encounter Books; America’s Way Back: Reclaiming Freedom, Tradition, and Constitution; and Political Management of the Bureaucracy: A Guide to Reform and Control. He served as President Ronald Reagan’s director of the U.S. Office of Personnel Management during his first term and can be followed on Twitter @donalddevineco1.
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