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<div class="timestamp">June 7, 2012</div>
<h1>Reagan Was a Keynesian</h1>
<span><h6 class="byline">By PAUL KRUGMAN</h6></span>
<div id="articleBody">
<p>
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. </p>
<p>
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?
</p>
<p>
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.
</p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
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