The worst Republican showing in a presidential and congressional elections in 16 years is more than a repudiation of George W Bush’s brashness or embrace of Barack Obama’s inclusiveness. This US election also marks the end of the Reagan Revolution, a consensus on the broad policies governing the country’s economy that has reigned in Washington DC for nearly 30 years. When the US electorate decided to chose Barack Obama and his promise of “change”, they were not buying a mere propaganda message. They did not necessarily understand what Obama stood for. What they did realise was that existing policies were no longer providing the prosperity and security they wanted. Republican candidate John McCain, by supporting tax cuts and free trade, was a regurgitation of Reaganism.
President Ronald Reagan established himself as one of the most popular US presidents in modern times with a triple policy mix: income tax cuts, support for free trade and aggressive deregulation. It proved to be a combo so successful it was continued by the next three presidents, including Democrat Bill Clinton. It was Clinton who waived the capital gains tax, exempted derivatives from the Securities Exchange Commission and pushed the North American Free Trade Association through Congress. It is due to Reagan’s policies that the past three decades have seen the most sustained economic growth in recent US history.
So what went wrong? The answer: the Reagan revolution did a poor job, to use an Obama phrase, of “spreading the wealth”. Initially, it was only the poorest who were left behind. But over the years, this stagnation spread even into the middle-class. In 2000, the inflation-adjusted income of the median American family was $61,000. In 2007, after seven years of economic growth, this figure stood at $60,500. Just as important was that even when household incomes did improve, it came with an increased sense of economic insecurity. People lost and regained jobs more often. The economy became a highway, but individual worth became a roller-coaster. Economist Jacob Hacker has shown that economic volatility among households has grown dramatically the past several years. “I’m tired of working for the economy. I want the economy to work for me,” said one female worker to Hacker.
Economists will argue about why exactly the Reagan formulae ran aground, but I suspect a major hazard was the rise of the emerging economies. The entry of Chinese and Indian labour into the global market helped depress the wages of even American middle class members. The subprime crisis, itself a by-product of too much cheap Asian capital, was the straw that broke the Reaganite back. Unsurprisingly, McCain who ran as Reagan’s heir apparent, saw his campaign implode when the sub-prime crisis was blamed on deregulation. Asian savings also suppressed interest rates and seduced middle-class families into augmenting stagnant incomes with debt.
No one should think Obama, a close student of Reagan and a University of Chicago graduate, is some closet socialist. “The market is the best mechanism ever invented for efficiently allocating resources to maximise production,” Obama once said. “But there are certain things the market doesn’t automatically do.”
He is expected to focus on those parts of the political economy which Democrats believe are impervious to the magic of the market. Top of the list: healthcare. This expansion of the welfare system will be the most evident difference between Obama and the Reagan consensus. Nonetheless, his advisors say that how exactly the welfare is paid for will be crucial. “We’ll know for sure that the Reagan era is over,” says Tim Adams of the economic advisory the Lindsey Group, “when the taxpayer reacts to the bill for greater regulation and bigger government.”
His other major action will be a partial rollback of some of the deregulation of the financial market. This is inevitable following Wall Street’s mayhem. Obama has said he will increase taxes on the wealthiest, reflecting his belief in taxes as a redistributive instrument. However, based on what he has so far announced, he will do little more than cancel the Bush tax cuts. This does not return US to the pre-Reagan years.
The biggest question mark hovers over his policies on trade. Obama will be caught between his own broad support for trade and a Democrat-dominated Congress that will howl for protectionism. The most interesting part of ‘Obamanomics’ is his plan to rejuvenate the US economy with a revolution in technology, something he and his aides saw the entry of the computer accomplish in the 1990s. Says Vivek Wadhwa of Harvard University, who has worked closely with the president-elect’s team, “Obama has a great vision for investing in innovation to tackle the issue of energy independence, of solving the problems of global warming, and so on.” His stress on green technology is as much about providing a long-term stimulus to the US economy as it is about saving the planet. His New Deal is going to be complemented by a Green Deal. Ultimately, Obama is a scholar who is driven by empiricism. He will check policies with goals, measure the efficacy of measures. As he once said, “My core economic theory is pragmatism, figuring out what works.” What his amazing election shows is that the US public has come to accept that the Reagan Revolution has run its course. The opportunity for an Obama Revolution now exists.