US Unemployment: What Would Reagan Do?

Friday's grim labour report is the latest confirmation that our economy is not recovering. A loss of 131,000 jobs and a stagnant 9.5 per cent unemployment rate are bad enough. But a deeper look shows how hard it's going to be to pull out of our crisis, and why the Obama administration's policies are unlikely to do the job, says Henry Olsen, vice president at the American Enterprise Institute.

History delivers sobering news on how long it might take to recover our economic health. There is only one instance since World War II of the U.S economy increasing the employment-population ratio (the percentage of working-age Americans who have a job, whether they are seeking one or not) by 5 percentage points in a decade: the recovery that followed Ronald Reagan's tax cuts in 1983.

In the mid-1980s, the employment-population ratio recovered less than two years after hitting bottom.

The momentum continued for the rest of the decade, fuelled by the 1986 tax reform that lowered the top marginal income tax rate to 28 per cent, allowing America to employ the millions of late baby boomers, women and immigrants who sought jobs.

By the time the boom ended in 1990, the employment ratio had rocketed to 63 per cent from 57 per cent.

An administration that pursued job creation – not ideology – would note this history and see how individuals and companies can create wealth and jobs quickly if they have the right incentives. Instead, we have policies that are uncertain and portend higher taxes and greater regulatory burdens. This is causing business and consumers alike to restrain spending, creating a drag on the economy too great for any government stimulus to reverse, says Olsen.

Someone once said that we should never let a crisis go to waste. In this historic employment crisis, we have no time to waste. Rather than tear down Reaganism, our leaders in Washington should heed its lessons and unleash the private sector that alone can pull us out of our doldrums, says Olsen.

Source: Henry Olsen, Unemployment: What Would Reagan Do? No other recession in the last 60 years saw such rapid job destruction, Wall Street Journal, August 10, 2010.

For text: http://online.wsj.com/article/SB10001424052748704388504575419280283794598.html

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First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 17 August 2010