[Vision2020] Reagan Was a Keynesian

[Art Deco]

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June 7, 2012
Reagan Was a Keynesian By PAUL KRUGMAN

There’s no question that America’s recovery from the financial crisis has
been disappointing. In fact, I’ve been arguing that the era since 2007 is
best viewed as a “depression,” an extended period of economic weakness and
high unemployment that, like the Great Depression of the 1930s, persists
despite episodes during which the economy grows. And Republicans are, of
course, trying — with considerable success — to turn this dismal state of
affairs to their political advantage.

They love, in particular, to contrast President Obama’s record with that of
Ronald Reagan, who, by this point in his presidency, was indeed presiding
over a strong economic recovery. You might think that the more relevant
comparison is with George W. Bush, who, at this stage of his
administration, was — unlike Mr. Obama — still presiding over a large loss
in private-sector jobs. And, as I’ll explain shortly, the economic slump
Reagan faced was very different from our current depression, and much
easier to deal with. Still, the Reagan-Obama comparison is revealing in
some ways. So let’s look at that comparison, shall we?

For the truth is that on at least one dimension, government spending, there
was a large difference between the two presidencies, with total government
spending adjusted for inflation and population growth rising much faster
under one than under the other. I find it especially instructive to look at
spending levels three years into each man’s administration — that is, in
the first quarter of 1984 in Reagan’s case, and in the first quarter of
2012 in Mr. Obama’s — compared with four years earlier, which in each case
more or less corresponds to the start of an economic crisis. Under one
president, real per capita government spending at that point was 14.4
percent higher than four years previously; under the other, less than half
as much, just 6.4 percent.

O.K., by now many readers have probably figured out the trick here: Reagan,
not Obama, was the big spender. While there was a brief burst of government
spending early in the Obama administration — mainly for emergency aid
programs like unemployment insurance and food stamps — that burst is long
past. Indeed, at this point, government spending is falling fast, with real
per capita spending falling over the past year at a rate not seen since the
demobilization that followed the Korean War.

Why was government spending much stronger under Reagan than in the current
slump? “Weaponized Keynesianism” — Reagan’s big military buildup — played
some role. But the big difference was real per capita spending at the state
and local level, which continued to rise under Reagan but has fallen
significantly this time around.

And this, in turn, reflects a changed political environment. For one thing,
states and local governments used to benefit from revenue-sharing —
automatic aid from the federal government, a program that Reagan eventually
killed but only after the slump was past. More important, in the 1980s,
anti-tax dogma hadn’t taken effect to the same extent it has today, so
state and local governments were much more willing than they are now to
cover temporary deficits with temporary tax increases, thereby avoiding
sharp spending cuts.

In short, if you want to see government responding to economic hard times
with the “tax and spend” policies conservatives always denounce, you should
look to the Reagan era — not the Obama years.

So does the Reagan-era economic recovery demonstrate the superiority of
Keynesian economics? Not exactly. For, as I said, the truth is that the
slump of the 1980s — which was more or less deliberately caused by the
Federal Reserve, as a way to bring down inflation — was very different from
our current depression, which was brought on by private-sector excess:
above all, the surge in household debt during the Bush years. The Reagan
slump could be and was brought to a rapid end when the Fed decided to
relent and cut interest rates, sparking a giant housing boom. That option
isn’t available now because rates are already close to zero.

As many economists have pointed out, America is currently suffering from a
classic case of debt deflation: all across the economy people are trying to
pay down debt by slashing spending, but, in so doing, they are causing a
depression that makes their debt problems even worse. This is exactly the
situation in which government spending should temporarily rise to offset
the slump in private spending and give the private sector time to repair
its finances. Yet that’s not happening.

The point, then, is that we’d be in much better shape if we were following
Reagan-style Keynesianism. Reagan may have preached small government, but
in practice he presided over a lot of spending growth — and right now
that’s exactly what America needs.




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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