Economic prosperity can be a difficult thing to measure when it comes to analyzing the mountains of data that economists provide us with. The Economic Report of the President 2006 alone contains over a hundred tables filled with data that at first glance, equate to absolute chaos, but upon closer inspection yield answers. Despite the plethora of data provided us, there are a few tables which hold much more weight in terms of interpreting economic performance, than others. These include, but are not limited to, the tables for consumer price indexes (CPI), real gross domestic product (real GDP), and unemployment. I shall analyze each of these concepts as they pertain to the presidencies of Ronald Reagan, George H.W. Bush, and William Clinton, spanning from 1981 to 2000. The three graphs attached—Graph 1, Graph 2, and Graph 3—outline how CPI, real GDP, and unemployment each fluctuated during each president’s term. CPI and real GDP are denoted in terms of the percent they fluctuated each year, and unemployment is represented as simply the percent unemployment for all civilian workers, for that particular year.
In order to measure the economic prosperity of America during any given presidents’ term, the terms CPI, real GDP, and unemployment must all be defined. What gives each of these measures the potential to be good or bad, therefore, must be outlined. CPI is the consumer price index, and it is by definition the measures of “prices of a fixed basket of consumer goods, weighted according to each component’s share of an average consumer’s expenditures” (David C. Colander, Macroeconomics 159). Inflation is an inevitable part of any market economy, particularly that of the United States. The stability of inflation rates in most cases denotes the solidity of an economy. A consistent and controlled inflation rate means that a market’s inflation rate is steady, and therefore its consumer price index is also steady. The terms inflation and CPI are, for simplicity’s sake, synonymous. A rapidly increasing CPI in turn means that consumers have to pay increasingly more for the same amount of good or service. The United States Department of Labor states, “The purpose of the CPI is… to measure the shifts in the purchasing power of the consumer’s dollar” (The Consumer Price Index: History and Techniques 19). Hence an appeal to logos implies that the smaller percentage inflation a CPI maintains, the better off consumers are because their money retains its value.
Every employee expects, or at least hopes for, a raise to come their way each year. For workers in general, an overall increase in pay implies that inflation must occur. However, how does inflation of salaries occur without the inflation of goods and services—CPI—occurring simultaneously? The answer is that it cannot. In order for companies to still contribute funding to research and development, develop new products, and raise wages, they must earn a profit. The only way this can be done, is to earn more money, usually through the inflation of the prices of their products. What one hopes, however is that the CPI does not inflate as much as the real GDP does. Real gross domestic product is a measure of “the market value of final goods and services produced in an economy, stated in the prices of a given year,” and is generally recognized as “the primary measurement of growth” (Colander 141). Growth is generally beneficial, however instability in the rate of growth has been an historic indicator of instability within an economy. Too much growth leads to rampant inflation, but not enough results in a stagnant economy, and neither is a good thing to have. A steady, consistent rate of real GDP growth is ideal for a market economy such as the United States’, and any growth within 1% under or 2% over the historical average of 3% is most ideal.
A third measure of economic success is a nation’s unemployment rate. Many people are excluded from being considered “unemployed” for myriad reasons, including age and personal preference. The basic principle of the unemployment rate, however, is the measure of the number of people who are willing to work, but do not. Colander asserts that “the unemployment rate is used as a measure of the state of the economy” (154). In general, and in conformity with Okun’s rule of thumb, the productivity, or potential output, of a nation is decreased substantially as its unemployment rate rises. In this way, an economy’s prosperity can be measured in part by its level of unemployment.
John Arthur Garraty laments:
Increases and decreases in unemployment are commonly thought to be connected to changes in the level of prices, the relationship being, according to modern theory, inverse. Inflation is supposed to reduce unemployment, deflation to cause it to go up. The relationship produces considerable social tension… (Unemployment in History 1)
Thus yet another conflict erupts in the motives of society. Is it better to focus on the future and attempt to keep inflation from rising too high by cutting jobs, or should people in societies accept “a gradual erosion of their purchasing power” (Garraty 1)? Good economic conditions allow for unemployment to fall as inflation maintains an acceptable level for an economy to still witness prosperity.
Ideally, consumers would like to have more money in their pockets to invest in goods and services; however, companies wish to profit as well and are forced to raise prices as a result. This is when inflation occurs. All the unemployed want to have a job, however when too many people are working, too much paper money is floating around, thereby increasing inflation yet again. There is obvious conflict between the CPI, real GDP, and unemployment rate. Each wishes to champion over the other but is limited in its success due to the constraints that each other places on it. The epitome of ideality would be ignorance in the way of these conflicts; however despite facing such problems, we must shoot for the stars regardless. The volume of jobs in America needs to increase while the value of the dollar increases as well, and the cost of goods and services remains low and/or steady. Therefore, for a president to preside over the best, most prosperous economic conditions during his tenure, conditions resembling the following must be present and ultimately prevail: a low-inflation, steady consumer price index that starts at a low percent (i.e. 2.5% to 3%), and does not make real significant gains; a real GDP that is also steady, without major quirks or jumps, and that is steadily increasing over time, however to a greater effect than that of the CPI; and an unemployment rate that is steadily falling (beginning no higher than 6.5% after two years of holding office), allowing consumers to take advantage of new jobs and opportunities, thereby enhancing the effect that increased productivity would have on real GDP in the way of increased output.
Ronald Reagan held office from 1981 until 1988. During that time, the US economy performed on a fairly mediocre level in terms of CPI, real GDP, and unemployment. Refer to Graph 1 in reference to President Reagan’s economic tribulations during his tenure. The percent change rate of the CPI during Reagan’s time took some sporadic leaps and falls. The real GDP did the same during this time; both instances however are occurrences not historically characteristic to a stable economy. International, as well as domestic factors may have played a role in shaping the economy during the ‘80s. Such events are negligible, however, to the vast changes that occurred under Reagan’s control. The consumer price index rose 30.4%, or an average of 3.8% per year, and did so in no steady fashion. This is the highest of the three presidents that will be examined. While the value of the dollar decreased as a result of this, real GDP under Reagan rose 27.4% during his tenure, or an average of 3.4% per year. Ideal economic conditions call for real GDP to increase by a greater margin than CPI; this was not the case however, and inflation ultimately took a downturn as the dollar lost value during the 1980s.
While Reagan boasted a significant real GDP climb, such a feat was immediately diminished not just by the even higher CPI gain, but by the horrendous unemployment rates that plagued his office. During one year—1982—unemployment for all civilian workers spiked at 9.7%; this is the highest rate recorded on The Economic Report of the President 2006, during the entire 46 year span it covers. The unemployment rate during Reagan’s two terms averaged a ghastly 7.5%. As Garraty stated previously, the relationship between inflation and unemployment is supposed to be inverse. However during the time in which Reagan held office, inflation became as rampant as unemployment! True, the CPI for goods and, particularly, services made a tremendous leap down in the first few years of Reagan’s tenure, the rate at which they fell too simply was not low enough yet to be considered, by economic standards, an acceptable margin of inflation. A simple moving average of the three economic components being examined herein would illustrate that while, during Reagan’s tenure, the CPI did decrease, the real GDP increased, and unemployment decreased, such feats are not enough to classify Reagan as having resided over America during a time of economic prosperity. This is because the unemployment and CPI rates were ridiculously high to begin with; likewise, the little increase at which real GDP ultimately amounted to over 8 years was achieved in one of the most sporadic and unstable ways possible. Solidarity and stability could be found in neither real GDP nor the CPI during Reagan’s tenure, nor did either even begin with a respectably low enough rate. In general, Reagan was not president during anything close to one of the more prominent time periods that American economics witnessed.
George H.W. Bush did the country no better a service when he served from 1989 until 1992. In reference to Graph 2, it’s clear that real GDP rose very little, actually repeating Reagan’s trend of touching a negative real GDP growth rate during one year. Similarly, there is no consistency in real GDP gain that illustrates a stable economic environment. For such a small rise in real GDP, CPI rose at 2.5 times the rate as real GDP under Bush. Growing at 3.3% per year, increased CPI meant that Americans had to pay more for the same goods and services they had previously gotten for noticeably cheaper. In this way, the value of the American dollar fell even further. While the unemployment rate during Bush’s tenure remained noticeably lower than during Reagan’s, it began to head back toward that direction, increasing every single year that Bush was in office. An unemployment rate that began at 5.3% climbed to 7.5% by 1992. The nation was not only losing the value of its currency ever so slowly, but was also prospering less in the global economy as its citizens began to find themselves in ever increasing numbers, jobless. Unemployment rose to unreasonable heights, real GDP increased only a minuscule amount, and CPI decreased only slightly from an already too high quantity, all during the four years in which George H.W. Bush occupied presidential office. Conditions under Reagan at least improved slightly from their horrid state, however under Bush, the condition of the US economy only worsened with time.
It can be said that William Clinton was forced to do the cleanup work for the two presidents before him: Ronald Reagan and George H.W. Bush. The results that the US economy experienced under the reigns of Bill Clinton are unparalleled throughout history, and can be seen on Graph 3. In every one of the criteria outlined above, the economy excelled under Clinton’s administration. The percent increase in CPI fell to its lowest rates in almost 30 years before the Clinton administration moved in. Concurrently, unemployment fell to an acceptable standard, with an average rate of 5.2% per year, with a consistent, steady decrease every single year. It even fell below the “target rate of unemployment” which Colander states is 5% unemployment (Colander 150). Unemployment did not reach a low that a group of experts appointed by the United Nations defined as, “a situation in which employment cannot be increased by an increase in effective demand” (Paul Hubert Casselman, Economics of Employment and Unemployment, 7). However unemployment did achieve the lowest value it would ever aspire to during the last 65 years, excepting only the years of the Vietnam War. Simultaneously, the unemployment rates for women and minorities also reach their lowest marks ever, with their unemployment rates cut virtually in half while the Clinton administration held office.
Even more excitingly, however, was the real GDP that Clinton’s administration championed. Real GDP increased an average of 3.8% per year for a net of 30.3% over those 8 years that the Democratic Party occupied the White House. The economy under Clinton can be recapped as follows: CPI began at a low percent and fell steadily lower; real GDP began at a fair percent of increase, and rose a solid, steady amount over the duration of Clinton’s two terms in office; and unemployment began low, but ultimately fell to its lowest percentage in over half a century. By all means, President Clinton presided over the United States during a time of economic prosperity far greater than any president before him.
In terms of decreasing CPI, increasing real GDP, and decreasing unemployment, while promoting fairness for all, the administration of William Clinton undoubtedly presided over the best economic conditions. That of George H.W. Bush seemed to preside over the worst conditions, although that of Ronald Reagan is a close second. Bush faced rising unemployment and a very unstable economy, as is clear by a real GDP fluctuation that actually dips into the red at one point. Reagan at least managed to deflate the unemployment rate a bit, as high as it was, and restore the nation, towards the end of his second term, to a fairly steady real GDP fluctuation percentage of about 4%. Clinton, however, managed to bring unemployment to all time lows, as well as increase the value of the American dollar by decreasing the consumer price index while increasing real GDP. Each was done at a steady rate, concurrently highlighting a very stable economy in which the Clinton administration operated. Clinton clearly presided over the best economic conditions, while Reagan had a close second to Bush, who presided over the worst economic conditions of the three presidents while in office.
Works Cited
Casselman, Paul Hubert. Economics of Employment and Unemployment. Washington, D.C.: Public Affairs Press, 1955.
Colander, David. Macroeconomics. 6th. New York: McGraw-Hill/Irwin, 2006.
Garraty, John Arthur. Unemployment in History. New York: Harper & Row, Publishers, 1978.
United States Department of Labor, The Consumer Price Index: History and Techniques. Bulletin No. 1517. Washington, D.C.: US Government Printing Office, n.d.
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