Reaganomics

With the election coming up, supply-side economics has returned to the policy discussion as conservative candidates play to particular factions in the party's base. In response, here's Paul Krugman on Reaganomics [Update: This documents many of the claims in his latest column]:

A few graphs on the Reagan economic record: ..."In short, the Reagan economy was a story of recession and recovery, but not of any sustained improvement in performance. That didn’t come until the middle Clinton years."

Partly this is an excuse for me to make the point once again that when it comes to stabilization policy, which is used to smooth business cycle fluctuations in the economy, supply-side economics has little to offer to actively respond to problems. Supply-side policies are not looking so good as long-run growth policies either - see the link above to the graphs or some of the discussion in this post - and supply-side policies are even more ineffectual as short-run stabilization tools. Given this, it will be interesting to see the extent to which politicians on the right insist upon including supply-side policies as part of a stimulus package and hold stabilization policy hostage with demands that such policies be included.

Update: Robert Waldmann comments:

Awesome Honesty: Just look at the first figure in Paul Krugman's post on Reaganomics. He claims that Reagan's performance on unemployment was not so good. In the figure he starts in the middle of a pre-Reagan recession and ends just before the economy took off. I'm not sure the figure could have been cropped in a way more favorable to Reagan or less convenient of Krugman.

Now that is honesty.

Comments

[Bruce Wilder]

Let me do an Anne. I don't agree with this analysis in every particular, but it is the most systematic and coherant analysis I have seen. I like it, most of all, because it makes clear the nature of the collective choice facing the country. It doesn't try to transcend normative considerations with a stilted abstraction.

Relief, Restructuring, Stimulus by Stirling Newberry

From six months ago, the conventional wisdom has turned around by almost 180 degrees. Last summer it was assumed that a few short shots of monetary stimulus had closed out the credit crisis. Last months pulverizing housing numbers, combined with the high inflation numbers for 2007, the worst in half a generation, have persuaded a number of people across the spectrum that "something must be done right now." Not everyone is persuaded, but if it can move through this Congress to be signed by this President, it is safe to say that within the Beltway the argument is leaning towards "do something" fairly hard.

However, as with a number of do something moments, what is being done, under what name, and for whom, is confused. Rather than talk about specifics being floated at the moment, because the debate wants to treat this stimulus moment as separate from everything else, let's look at the three parts of dealing with an economic downturn: relief, restructuring, stimulus.

Relief identifies a group of people particularly hard hit by the downturn, and provides them with a short term hit of liquidity or income so that they do not become insolvent and collapse to a lower level of economic activity permanently. Not all relief is a good idea. The Republicans have for a generation pushed "tax relief" - especially for people who make lots of money. The rest of us have seen tax shifting, but not much actual "relief" from our tax burden.

Restructuring deals with creative destruction. It means paying of insured depositors in bank failures, it means ending fiscal and regulatory choices which are no longer performing, if they ever did, and it means providing incentives going forward to new areas.

Stimulus is counter-cyclical spending designed to get people back to work as quickly as possible after the downturn.

Let's look at the last economic downturn and see what choices were made.

In the last down turn investors got a massive relief package in the form of long term reductions in taxation. Ordinary tax payers got a $300 prebate, and some reduction in withholding. Some taxpayers got credits for dependents.

The Restructuring was to a war time economy. This is far broader than Afghanistan and later Iraq, but includes things such as No Child Left Behind, and the Department of Homeland Security. A shift from consumer technology to security technology. It also went with the shift in fiscal policy from deficit reduction, to massive, and often unaccounted for, deficit spending.

The Stimulus was the actual wave of spending released by the invasion of Iraq, and the appropriations since then.

These are not in isolation of monetary policy, which was extremely, one might even say, historically, accommodative.

Historically speaking, the rebound in the labor market accompanies fiscal stimulus. Where it is present, the rebound happens like a shot after the contraction is over, when it is not, the rebound in the labor market is delayed. In the last expansion there was a deliberate decision to delay stimulus until the invasion, and as a result the labor market did not really recover until mid 2003, even though the rest of the economic indicators had left recession before that.

One of the other nets of the decisions was that a great deal of the benefits went to a very small slice of the population. The rich bounced back. The rest of us worked harder and got less, if we were working at all: the 2000's featured the longest period of long term unemployment since the early 1960's.

Many of these decisions will be made based on the results of the 2008 election. The 2008 election will determine, to no small extent, what the next economic cycle looks like, how long it will last, and who will get the benefits. As little enthusiasm as many candidates excite among the respective bases, the reality is that this election does mean a great deal. It is not a holding pattern election.

While policy proposal specifics are the Kabuki of medium and high information political discourse, what is more important is the fundamental philosophical thrust of a party, a caucus in Congress, or a President. This is because no proposal survives contact with reality, and every final economic plan is a matter of crafting specific demands into a large picture.

In the present circumstances, the best relief program would end the tax breaks for the wealthy and shift that money in the short term to buffering groups hard hit by the economic downturn. Tax credits and so on are, almost by definition, not the best way to do this, because they give money to people who already have jobs. This violates one of the most important liberal principles: demand spreading. Demand spreading means, all other things being equal, it is better that more people have some money, than some people having more money. Social Security is based on this principle as is the liberal theory of government starting with FDR. FDR ran both as Governor of New York and for the Presidency under the theory that demand was misallocated, and that people outside of the centers of economic activity needed to be able to afford goods. Universalization of electricity and phone service were undertaken under this theory, as were the various subsidy programs.

Thus as soon as a candidate, caucus or program makes "tax relief" its center, it is already marching to the right.

In the present circumstances, the best relief programs would be aimed at groups who are dislocated, or who have been dislocated as a matter of course. One of these groups consists of the National Guard and others who have disproportionately born the brunt of Iraq. Relief programs which treat them as deserving of "tax relief" on soldier's pay, miss the point. The best relief programs would also interlock going forward with restructuring.

This means, ending Iraq. Not sort of renouncing territorial ambitions in Iraq and surrendering to the Republic of Al-Anbar, which, for those of us paying attention, is what just happened - but pulling out of Iraq. This has two advantages. First it is a vast amount of money for other projects. Second, right now the US is the largest single source of economic activity in Iraq. Without US dollars and projects flowing in - to do things that aren't getting done anyway according to the GAO - there will, one can bet, be a great focusing of minds in Iraq on how to get the oil flowing and on ships.

Restructuring also needs to be aware of a simple fact: namely that a massive bank bail out is coming. Charlie Rangel has already indicated a willingness to do a complete overhaul of the tax structure. One hopes that his preferred candidate is willing to do this as well.

Restructuring also needs to address how we are going to reëmploy the massive glut of residential capital that has been constructed, and how to import less oil and export more goods.

Restructuring would ideally address sources of inflationary pressure: food, health care and energy.

With these pieces in progress, the actual need for stimulus can be examined. This will be far less actual stimulus as such, than would otherwise be needed. The American economy needed massive stimulus this last decade in order to deal with a host of truly astoundingly rotten fiscal priorities. That is, we needed far more deficit spending than would otherwise have been the case. While we should never shy away from borrowing when we need to, and spending what we must, we should always be seeking to borrow and spend the least necessary, not the most possible. It's better go keep credit good, it is better to keep the money in the hands of the general economy, and it is better for Government to pursue plans that generate enough economic activity to support those plans by the increased tax revenues that come with increased activity. While nominal deficits aren't to be feared, actually downward spirals in the national debt - where the debt is growing faster than our real ability to pay it back - are to be avoided except in cases where swastikas and rising suns are actually blooming around the world, and not just in the imaginations of the 101st fighting keyboarders.

In our present circumstances the progressive movement has put forward the most coherent vision that addresses these three points. Relief can be expanded by ending Iraq and ending tax breaks for the very wealthy. Restructuring can be best pursued by ending the weak dollar policy, and making a non-carbon based energy system a long term goal, and universal, provider-patient health care, ideally under a single payor model a short term goal. Stimulus will be accomplished by specific spending programs designed to make these two goals possible. The conservative, moderate and reactionary movements have not come close to creating as coherent a vision of what needs to be done and how to do it.

Right now the conservative-reactionary coalition proposes a tiny deficit based stimulus/relief package, continued weak dollar policies, continued expenditure on Iraq, continued deficit spending as far as the eye can see, no effective steps to contain energy, health care or food inflation, and no money being allocated for the inevitable financial bailouts, other than to sell Wall Street to Dubai one bank at a time.

The moderate movement proposes that we should do all of this, only with more civil discourse.

There are clear choices, and while the voting booth is a woefully inadequate instrument by itself to reach them, it is one of the tools we have. Which, not coincidentally, means making sure that t works as well as is possible, as opposed to as well as is convenient for particular interest. Among these clear choices are whether we are going to restructure away from a series of very bad choices made this decade, and towards better ones.

So far the progressive movement, and only the progressive movement, has made this commitment.

[algernon]

Krugman, you are being silly. Not even you would pretend that the prosperity since 1980--in marked contrast to the 1970s--would have occured without the reduction in very high marginal tax rates (70%!) of the Carter years & some degree of deregulation that occured because of Reagan. That US share of global GDP went from ~a fifth in 1980 to ~ a quarter in 2000! is some of Reagan's legacy.

Sure, supply siders use the short-term stimulation thing as a ploy. But it is hard to argue that in the long run reducing the burden of gov't on an economy isn't beneficial, when the gov't in question is as big & stupid & meddlesome as our own.

[bakho]

Great post from Stirling. Thanks for the repost.
The 1970s were a time of restructuring. The oil shock was causing stagflation. Ford moved forward on some energy conservation, but the ball was really pushed up hill by Carter. Once the energy conservation and energy shift away from oil was complete, the economy by the mid 1980s was ready for recovery.

The drop in the marginal tax rates for the top bracket started the increase in wealth disparity, but did not add much to average worker income. There is no trickle down, only trickle up.

[bakho]

The US imports about 13 million barrels of oil/d.
At $100 dollars/barrel X 13 X 365, that is about $474 Billion per year.
In 2004 when oil was $40 /barrel, oil imports were costing closer to $190 Billion per year.
That is a $280+ Billion per year more that is going out of our economy overseas.

By comparison, a stimulus will put about $100-150 billion in circulation.
Do we have an oil shock problem?

[Peggy]

After President Carter decontrolled the price of oil, jobs went under. Gas went uop. In his outgoing speech, Carter warned about special interests b betraying the country he meant oil.

Under Reagan, the "trickle-down" economy he created was so bad that old people ate dog food - if they could afford it!

Even though we had "good" jobs, we were so broke under Bush Sr. that we shopped at garage sales for clothes. I felt lucky to find T-shirts for a dime.

It wasn't until Clinton came to office that we finally had money. A year after he got in, I was so happy to be able to afford a winter coat for the first time in years. I got the job of my dreams and we really enjoyed our lives.

How can people forget this? Clinton balanced the budget and he and Gore brought the economy back to life.

We've been go
ing backwards under Bush jr. ever since, and we're coming undone right now.
Economists don't don't understand life, they're just academic engineers who live in a fantasy world, whispering in the ears of paranoid thieving wealthy people that the that the rest of us are thieves, too.

I wish there was a planet we could out the wealthiest people in the world and all the free trade economists so they could mug each other, and leave the rest of us alone.

Sick puppies.

[save_the_rustbelt]

"Under Reagan, the "trickle-down" economy he created was so bad that old people ate dog food - if they could afford it!"

That is so ridiculous is it tough to respond.

I wish we could send liberals to an alternate universe in which Jimmy Carter was reelected in 1980 and the 12.5% inflation and 19.25% prime rate would have continued.

Krugman is not a reporter, but an opinion columnist, so let us give him no more credibility than he deserves.

[gc]

Is the lengthy post Bruce Wilder or Sterling Newberry?

It makes sense to me, but a big item that I perceive is missing is reregulation of the banking industry.

the savings and loan meltdown was a mix of problems, but without any academic support documentation, the dominant problem for the industry was borrowing short and lending long. Securitization, as an answer for this problem, makes sense. But at the same time the securitization program was implemented by individuals who have quasireligious antipathy to government and anything that can be called regulation. So, many changes were rolled into the mix and we ended up with deregulation of banking.

It is not twenty years later and the most major money center banks tell us that they haven't an idea how much their portfolios are (attribution to Atrios) "a big shitpile." And with all the opaque and unexplained leverage by hedgefunds, it is one big gambling crapshoot, instead of the control of society's capital by an industry that always should bear some sort of fiduciary responsibility to all of us in the economy.

The system is killing off the defined benefit plans where big entities and professional money managers had an obligation to mimic the performance of the social security system. To just be there for their participants.

So, in this world where self managed 401k's and IRA's are the replacement for any plan that guarantees a benefit, if I don't want my small bag of pennies to be in the hands of the financial world of gamblers and thieves, then shouldn't I just put them under the mattress? And if, as an ecomony, we don't all the small investors to take their money home and hide it, don't we need to reimpose some fiduciary responsibility on the financial system, which requires enforcement in the nature of regulation?

Such a reregulation will offend the religious principals of the anti-government crowd; so, if it is to happen, then it is going to take a bunch of talk about the current problems that brings some light to all the opaque activities that have been happening to the major banks and hedge funds, and credit default swaps and all that. But if the Banks are not really losing the money they are announcing, and we are not really having a financial problem, then banking is not part of the problem and it doesn't need to be part of the answer.

[p_g]

What about spending?

I'm no economist, but I think that the more meaningful discussion is about spending, not taxation. IMO, unless the US 'balances the books', somebody else is going to impose it. I'd suggest that you'd rather not have domestic or foreign policy dictated by your Chinese overlords ... uh, I mean creditors.

[James Killus]

I looked at the graphs that Krugman posts, in light of the Waldman comments. Maybe someone else can see what Waldman is claiming to be there, but I don't. All the graphs begin well before the Reagan years and end well after, with no obvious cherry picking that I can see. So I'd recommend that anyone wanting to have an opinion about the Waldman criticism should look for themselves. Were it up to me, I'd say that Waldman is claiming things that aren't true.

[Cyrille]

James, initially I made the same mistake as you.

Waldman is not criticising. He is praising. He noticed that Krugman is using pretty much the exact period that would have Reagan look better than he should, and his own argument weaker than it could.

Which is not exactly common practice these days, where data are often cherry-picked. Waldman is saying that by selecting a time period that, if anything, hurts his point, Krugman is being spectacularly honest.

[hari]

Paul has done an objective analysis. The facts speak for themselves. However the consequence of Reganomics is really the political economy of rich getting richer - while the working class are taxed at source.

How does one explain the growing inequality today? Is it all due to globalization or some failure of domestic economic policy framework?

Political economy advises us that the "right" will always tax the poor for benefit of the established classes. It same all over the globe - one can't get over the ideological preconceived mantra of suplly-side economics.

Paul, I'm confident, will in due course (perhaps after next election!) deal with Clinton's economic legacy and its merits/demerits of pushing foward unregulated globalization (ie. without a global infrastructure to manage its fault line, etc.).

[spencer]

The average unemployment rate in Reagan's first term was higher then the average in Carter's term.

Carter ended with a recession and Reagan began with a recession-- so to a great extent it is an apples to apples comparison.

PK is not cherry picking data points.

If anyone is cherry picking data points it is Wallmann.

Reagan's economic record is better than every other Republican president -- but worse then every Democrats
record.

While we had problems in the 1970s, on average real GDP growth and real income growth in the 1970s was just as strong as in the 1980s.

I suggest all those raising all those objections actually look at the data.

[ken melvin]

Take away Ronnie's stage presence and the ensuing hype from the chorus and there ain't much Ronnie left.

[Farrar]

"Restructuring also needs to be aware of a simple fact: namely that a massive bank bail out is coming."

Private banking has proved incapable of managing credit. They've had many chances down thru the years.

I repeat: nationalize all insolvent banks.

[Farrar]

"Restructuring also needs to address how we are going to reëmploy the massive glut of residential capital that has been constructed"

Obvious solution which will certainly be ignored. Take them over for subsidized HUD housing.

I can't understand why such obvious simple solutions are ignored. There may be a surplus of housing, but there is also a surplus of homeless or ill housed people.

Since there is no longer any market, why continue in the vain hope for market solutions.

Economics is apparently the pseudo science of avoiding the obvious.

[2slugbaits]

Somewhere along the line the main point that I think Mark wanted to make seems to have gotten lost. Much of the post-1982 growth that we saw immediately after the recession was simply due to the natural tendency of the economy to revert to mean growth trends. The huge deficits of the early 80s acted as a traditional fiscal stimulus. Of course, at the same time the Fed's policies worked to choke off growth. A lot of supply siders try to take credit for growth rates that were simply going back to trend levels. The real test of supply side economics is whether or not it lifted growth rates once the economy returned to full employment. And there is no evidence that this happened. Mark's second point was that supply side economics (even if true) is certainly the wrong prescription when the problem is weak aggregate demands. In fact, supply side polices , to the extent that they actually work as advertised, would only widen the gap between potential GDP and actual GDP.

This puts supply siders in something of a box. In order to claim supply side tax cuts are successful in pushing out the supply curve during full employment, they end up undercutting their arguments for supply side tax cuts during a recession. And to the extent that tax cuts during a recession are simply another word for good old fashioned Keynesian demand side economics, they undercut their argument for pushing out the supply curve.

[Cyrille]

To the Waldman criticisers, his post his called "Awesome honesty", and is NOT sarcastic.

Waldman is not cherry picking anything.

[Holly W.]

STR: I wish we could send liberals to an alternate universe in which Jimmy Carter was reelected in 1980 and the 12.5% inflation and 19.25% prime rate would have continued.

And would Jimmy Carter NOT have appointed Paul Volcker Fed chairman in this alternate universe? Do you think it was Reagan or Volcker who did the greatest hard work of inflation-busting?

[rufus]

Cheers! Holly

Volcker was under appreciated for his work in identifying and resolving the inflation problem. Just as Greenspan is over appreciated for his tunnel vision with regard to this matter, which resulted in his lack of oversight giving rise to the latest lending scandal that has led to the current credit crisis.

[bakho]

Did Volcker really bust inflation? or was drop in oil demand by 20% and ease on energy price increase a bigger deal?

[2slugbaits]

Bakho,

Volcker really did bust inflation. Remember those Mishkin articles about a year ago that Mark posted on inflation being a monetary phenomenon?

[Lafayette]

Bushonomics (Father & Son)

The next time your thinking of voting for a dynastic president, think of this bit of interesting politico-economic history: Bush May Leave Ballooning Deficit, Curbing Successor's Programs

[Lafayette]

Peg: How can people forget this? Clinton balanced the budget and he and Gore brought the economy back to life.

It never ceases to amaze how much we associate economic progress (growth, diminishing employment, increasing wages) with a Presidency.

I fail to see, in the historic figures, all that much correlation. Bill just got lucky and, as he left office, the fit hit the shan. Does that means that, without Bill's deft steering of the economy, it didn't know how to go any further upwards? I think not, it's self-destruction was inevitable; fueled by a long, over-heated dot.com bubble.

Moreover, as I've posted elsewhere in this forum, the rate of poverty over the past 35-years has rarely budged from 12/13% of the population - regardless of the party in power. Anyone care to give us a cogent reasoning for that sordid fact?

Care to compare it with the results of the opposite class at the other end of the income spectrum, i.e., the upper 10%?

Maybe we are giving all too much credit to the Executive branch, and most of the blame as well? That's far too easy and does not wholly explain the complexity of our economic system, I submit.

The consumer has great influence on economic outcomes, far more than the individual may think - because the whole is greater than the unit (when it comes to economic phenomena).

The Fed probably has as much, if not more power, to influence our economy than the PotUS. Let's remember that the PotUS has only one instrument - fiscal. Meaning the PotUS can tweak tax revenues and/or expenditures. (And this one has lowered the former and raised the latter, which is tantamount to fiscal ineptness.)

My point: We should disregard the Smiley Face mouthing platitudes; but look closely at their election platform. And, measure their performance in office, as best possible, against what they accomplish and less what they said.

Which, for sure, ain't easy.

[ken melvin]

Sometimes,ever so often, ... we need to ask what would have happened if ... What if there had been no war on poverty, no welfare, medicare, headstart, ... ?

[Lafayette]

km: we need to ask what would have happened if ...

What would have happened if there had been no 9/11?

No second term for lead-head? More responsible governance from some other PotUS?

The mind boggles at the Opportunities Lost. Bin Laden must be having himself a good laugh.