Two presidents, two recessions

Reporting from Washington —  A charismatic president sweeps into office amid economic turmoil, promising to turn the country around. Instead, things get worse. The unemployment rate climbs into double digits and the federal budget deficit soars, sending his approval ratings plummeting and triggering unrelenting criticism of his economic strategy.

It’s the tale of President Obama’s first year in office -- but also of Ronald Reagan’s nearly three decades ago.

As the economy staggers out of the Great Recession, there are some key similarities to the nation’s last severe economic slump in the early 1980s that offer clues about stoking a recovery -- and the political implications if one doesn’t happen quickly enough.

A clearly articulated economic strategy, bolstered by his ability to project a sense of optimism that conditions would improve, was crucial to Reagan’s success. That is the main lesson for Obama, who has been criticized for not providing a clear economic vision, said Dean Baker, co-director of the liberal Center for Economic and Policy Research.

“ ‘We’re going to cut your taxes and get the economy going again.’ It was a clear message,” Baker said of Reagan’s efforts. “Whether it worked doesn’t really matter. It was something people could identify with as ‘Here’s what they’re doing.’ My expectation is that Obama is going to have problems because he hasn’t put forward a clear plan.”

The nation’s continued economic troubles have sent Obama’s approval ratings spiraling just as they did Reagan’s. Though Obama’s rating hit a new low of 46% last week, it has yet to plunge to the 35% Reagan hit in early 1983.

But even when Reagan’s political prospects and the nation’s economic outlook appeared bleakest, his clear strategy helped him rebuild support, said Annelise Anderson, an economist and senior fellow at the Hoover Institution who worked in the Reagan White House.

“In the Reagan administration, you had enormous certainty about what the objectives of the administration were,” she said. “In this administration, there’s a huge amount of uncertainty. We don’t know what’s going to happen on healthcare. We don’t know what’s going to happen on energy.”

Many Republicans say Obama should follow Reagan’s recession-fighting strategy, which hinged on across-the-board tax cuts.

The period following the 16-month recession from 1981 to 1982 is a textbook example of the post-World War II trend of strong growth following deep downturns. The nation’s economic output shot up 9.3% in the second quarter of 1983, a few months after the recession officially ended, and the gross domestic product grew at a brisk rate of more than 7% in the year after that.

Reagan pulled his approval ratings out of a nose-dive and won reelection in 1984 with a campaign theme that highlighted the country’s economic rejuvenation -- “It’s morning again in America” -- but not before the recession’s lingering effects cost his fellow Republicans 25 congressional seats in the 1982 midterm elections, a larger-than-usual loss that was attributed to the sluggish economy.

“Do what Ronald Reagan did, and you will solve the problem,” Rep. Dan Burton (R-Ind.) publicly advised Obama last fall.

It’s not so simple.

There are significant differences between the two recessions. Although the unemployment rate was worse in the early 1980s -- it peaked at 10.8% in late 1982, well above the 10.1% high of last November -- most economists agree that the Great Recession that began in late 2007 has been worse.

The financial system took a severe hit this time, increased globalization spread the calamity worldwide more quickly, and households saddled with more debt -- particularly mortgages on homes whose values had cratered -- were less prepared to deal with the fallout.

Because of such factors, the early 1980s approach won’t work as well this time, and the economic rebound is likely to be slower and weaker, said Mark Zandi, chief economist for Moody’s Economy.com.

The economy is expected to continue expanding after growth returned in mid-2009, but at a slower pace than it did in the final three months of last year. The GDP for that quarter was revised upward recently to an annual rate of 5.9%.

Still, a public that has been bombarded with bleak economic forecasts could learn something from that earlier downturn, Zandi said.

“One comfort should be that we recovered so well from that recession, as bad as it seemed at the time,” he said. “In the darkest of times, we shouldn’t believe there’s no way out. Our economy is probably going to be much stronger five or six years down the line than people are expecting now.”

That optimism is reminiscent of Reagan’s when the nation was struggling with the second half of a double-dip recession.

Even as his approval rating was diving during his first two years in office, he urged Americans to “stay the course” on his economic policy. That plan combined tax cuts with widespread deregulation of airlines and other industries, along with a sharp increase in military spending to counter the Cold War threat from the Soviet Union.

Reagan also supported the ongoing policies of the Federal Reserve under its then-chairman, Paul Volcker, now an economic advisor to Obama.

The Fed was widely believed to have caused the 1981-82 recession with sharp increases in interest rates designed to tackle another major economic problem: double-digit inflation. Those hikes caused 30-year mortgage rates to hit 18.45% in late 1981, leading to a sharp decline in home sales and construction.

They also led to doubts about Reagan’s future.

“People were discouraged. They thought he wouldn’t be reelected in ‘84, but he stuck with it,” economist Anderson said. “By ’84 the economy was roaring.”

The tax cuts and increased spending caused the federal budget deficit to soar under Reagan, from $79 billion when he took office to $208 billion in 1983, equivalent to 6% of the nation’s GDP and at the time the highest level since World War II.

“The thrust of fiscal policy was very stimulatory,” Zandi said. “It wasn’t called stimulus, but it in fact was just that.”

Obama tried to duplicate that jolt to the economy with the $787-billion stimulus bill passed last year. It included tax cuts targeted at the middle class and increased government spending -- this time focused on highways, bridges and other infrastructure.

Although the stimulus has helped boost U.S. economic output and dramatically eased what had been a staggering rate of job losses, it has not yet been able to reverse the employment tide nationwide.

Interest rates have not been a problem during the Great Recession and its aftermath. They started low, and the Fed has reduced its own rate to near zero to try to ease a credit crunch.

That robs the Fed of a key tool it used after the early 1980s recession. The high interest rates then led to pent-up consumer demand for homes, cars and other big-ticket purchases. As the economy began improving, the Fed was able to turbocharge the recovery by lowering interest rates.

The circumstances are different this time, said Baker, of the Center for Economic and Policy Research.

“Obviously we can’t lower interest rates further,” he said. “There isn’t a big pent-up demand for housing. We have a glut, and will for some time.”

As in the early 1980s, the budget deficit under Obama sharply increased, reaching $1.4 trillion last year. And at 9.9% of the nation’s GDP -- the total value of all goods and services produced -- it is significantly worse than the 6% of the Reagan era and presents a larger problem now because of pressure being added to Social Security and other entitlement programs by the aging of the baby boom generation.

“It’s not only the current deficit that’s worrisome, but our longer-term prospects are much darker than they were in the early ‘80s,” Zandi said. “Back in the early ‘80s, the baby boomers were still decades away from retirement. Now they’re looking at retirement square in the face.”

jim.puzzanghera

@latimes.com