Reaganomics vs. Bidenomics

Federal Reserve Chair Jerome Powell (R) speaks as President Joe Biden (L) listens during an announcement at the White House on Nov. 22, 2021. Alex Wong/Getty Images

News Analysis

The legacy of former Federal Reserve Chair Paul Volcker, a Ronald Reagan appointee, is frequently invoked by financial media outlets in light of today’s high inflation, which has reached levels not seen since these men occupied office.

Many wonder if current Fed Chair Jerome Powell has the resolve to combat inflation as his predecessor did in the early 1980s. Even crypto outlets Such as Coindesk are begging the question, “Is Powell 2022’s Volcker?”

Volcker’s legacy is viewed in an overwhelmingly positive light.

As noted by Bloomberg, “Central bankers like to be compared to Volcker.”

Implicit in these views is the belief that the Federal Reserve and its chair are largely responsible for the consumer price level. As President Joe Biden said in May, inflation “starts with the Federal Reserve, which plays a primary role in fighting inflation in our country.”

Is Biden correct? Was Paul Volcker a lone warrior in the inflation fight of the 1980s, or did President Ronald Reagan’s fiscal policy play a considerable role?

According to Joseph Wang, a former senior trader on the Fed’s open markets desk, fighting inflation requires a collaborative effort from both central bankers and politicians.

“The Fed can raise interest rates to slow spending, and Congress can either reduce fiscal spending or raise taxes,” Wang told The Epoch Times. “The fight would be much more effective if both the Fed and Congress were working together on fighting inflation.”

In the year following his election in 1980, Reagan cut welfare spending by $22 billion (more than $70 billion in today’s dollars), according to The New York Times, and continued cutting well into the recession, which began in July 1981.

Such policies were far from popular. Reagan faced considerable public backlash from many leading media outlets as the nation suffered from crippling poverty and unemployment.

In a 1984 Washington Post article, the author tells the stories of more than 200 families in Georgia, that were kicked off Medicaid after Reagan’s welfare cuts, with many falling below the poverty line, forced to give up their houses and rely on financial support from family members.

U.C. Berkeley Professor Ronald Takaki published a New York Times op-ed in 1986 lambasting Reagan’s cuts for exacerbating poverty, citing that “between 1980 and 1983, the number of poor Americans soared from 29 million to 35 million.”

With federal social benefit payments totaling $2.85 trillion today, as compared to $202 billion in 1980, will Biden be able to meaningfully rein in spending to combat inflation?

President Ronald Reagan meets with Paul Volcker, chairman of the Federal Reserve Board, in the Oval Office on July 16, 1981. Bettman/Getty Image

Tax cuts were another crucial component of Reaganomics.

While Wang suggests that Congress should raise taxes to fight inflation, another Federal Reserve alumni and a former Reagan economist, Lawrence Lindsey, disagrees.

In his book, “The Growth Experiment,” Lindsey argues that modern economists view tax hikes too narrowly as a tool to reduce aggregate demand but ignore their negative impact on the supply side, whereby production slows as the private sector is burdened by higher costs and complexities in the tax code.

History provides supporting evidence for Lindsey’s position. Despite aggressive tax cuts, inflation moderated considerably during Reagan’s first term, falling to 3.2 percent by 1983 from 13.5 percent in 1980.

Biden’s Economic Plan

Currently, the administration is sending mixed signals on the inflation-fighting front, with initiatives such as Biden’s recent executive order on student loan forgiveness, which is estimated to result in $500 billion in total added consumer purchasing power, according to Brookings.

For reference, the total cost for Economic Impact Payments (EIP), the direct-to-consumer stimulus checks that were mailed to every adult during the COVID-19 pandemic, was $803 billion, as stated by the Pandemic Response Accountability Committee.

“Pandemic direct fiscal [efforts] were basically trillions in helicopter money. I think it was a major contributor to inflation,” Wang said of the EIP program’s inflationary impact. “The stimulus payments were money printed and given directly to people to spend.”

Student loan forgiveness isn’t all that different, because it “effectively stimulates the economy by increasing the disposable income of student debt holders,” he said.

Critics of the student loan decision, such as economist and founder of Euro Pacific Asset Management Peter Schiff, call the forgiveness a “horrible idea,” saying that it will lead to more inflation.

“Money that otherwise would have been used to repay debt will be used to purchase goods and services instead,” Schiff said.

Nobel Prize-winning economist Paul Krugman believes that the inflationary impact of the forgiveness will be negligible.

“All the talk about inflation is fairly baffling, for two reasons,” Krugman wrote in a Twitter thread.

“First, the U.S. is a very big economy. Any impact of this forgiveness on spending will be small relative to GDP. ... Second, to the extent that deficit spending was inflationary in 2021, it was because the Fed was accommodative.”

Krugman noted that because Jerome Powell is now hiking rates, the loan forgiveness “will be offset by monetary tightening.”

President Barack Obama introduces the President's Economic Recovery Board, chaired by former Federal Reserve head Paul Volcker (L), in the East Room of the White House on Feb. 6, 2009. Nicholas Kamm/AFP/Getty Images

‘Fueling Inflation’

In addition to student loans, Social Security payments are set to increase. Beginning in December, recipients will see an increase of 8.7 percent toward their benefits, the largest increase in 40 years.

“People are supposed to cut back when prices go up. But if the government gives everybody more money to pay the higher prices, you’re just fueling the inflation,” Schiff said about the recent increase. “It’s like a dog chasing its tail. You’re never going to catch it, which is why the government is never going to bring inflation down.”

However, the Biden administration has made progress on one front: gas prices.

Fuel prices have moderated in recent months in tandem with the administration’s releases from the Strategic Petroleum Reserve (SPR), where government-owned oil is sold on the open market.

Last week, Biden pledged an additional 15 million barrels to be sold, which will bring the total amount released to 180 million barrels.

Wang acknowledged the disinflationary effects of these releases but emphasized that this solution is temporary.

“[Biden’s] release of the SPR to lower oil prices seems to be working,” he said, “but could simply be shifting the timing of higher oil prices further into the future. Eventually, the SPR will be empty, and then prices may continue to rise.”

With gas prices still 67 percent higher than when Biden took office, and recent commitments to public spending increases, it remains to be seen whether Powell and Biden will go down in history as the next Volcker and Reagan.

Former Reagan economic adviser Steve Hanke is pessimistic on the prospect.

“Bidenomics has been breathtakingly bad ... The U.S. president and his hacks in the press, like Prof. Paul Krugman, are in La La land,” he wrote on Twitter in July.