Two Reagans

As the years pass the Ronald Reagan administration looks worse and worse. Well, at least half of it does (more on that later). One of the best indications of the relative success of Reagan's economic policies is the incredibly poor quality of the writing that seeks to defend them.

This morning's USA Today offers an excellent example. In an essay entitled "The Reagan Stimulus vs. the Obama One" Paul G. Kengor seeks to show how Reagan's tax cut stimulus was a rousing success while Obama's fiscal stimulus was a complete failure. The essay gets off to a shaky start:

Reagan's initiative was the antithesis of President Obama's $800 billion "stimulus" that didn't stimulate. The 2009 version was the single greatest contributor to our record $1.5 trillion deficit. It was, plain and simple, what Reagan didn't do.

Obama's stimulus didn't stimulate? All of the independent economic analysts (CBO, Moody Analytics, etc.) that have looked at the 2009 Recovery Act have concluded that it achieved just about what the administration said it would. The problem wasn't the effectiveness of the stimulus. As I have written here before, the problem was that the economic hole we were in was much deeper than anyone knew at the time. This is not opinion. Recent revisions of GDP data have confirmed this. We are entering a very weak economic patch right now at least partly because the effects of the stimulus are pretty much over.

The stimulus was the "single greatest contributor to our record $1.5 trillion deficit"??? This one is a real howler. Anyone even marginally familiar with the data knows that the CBO predicted in January 2009 that the deficit for 2009 would be well above $1 trillion. This is BEFORE the stimulus was even proposed, and certainly before any of its provisions had taken effect. The deficit exploded in 2009 not because of the stimulus, but because of the financial crisis--tax receipts shrank and automatic safety net programs (unemployment insurance, food stamps, etc.) went up.

The opening paragraph pretty much sets the tone for the remainder of the essay, which is a hagiographic combination of remembered Reagan through a filter of selective amnesia and rose-colored glasses. He continues to extoll the virtues of the Reagan tax cuts:

The enemy that day was America's progressive federal income tax system. . . .

After a slow start through 1982-83, the stimulus effect of the cuts was extraordinary, sparking the longest peacetime expansion in U.S. history. The "Reagan Boom" not only produced widespread prosperity but—along with the attendant Soviet collapse—also helped generate budget surpluses in the 1990s.

Again, none of the primary claims in these two paragraphs are true. First, the main obstacle to economic growth in the first two years of the Reagan administration had nothing to do with tax rates. The chairman of the Federal Reserve, Paul Volker, had decided that he was going to once and for all wring inflation out of the American economy. He did this by severely restricting the money supply and raising interest rates to 21%. This is not a typo. Volker's plan worked, lowering inflation from 13.5% in 1981 to 3.2% by 1983. However, in the interim it had a devastating effect on the economy, which experienced the deepest recession since the 1930s. However, when Volker decided to declare victory over inflation and lower interest rates back to normal levels, the economy exploded. In comparison to this, the effects of Reagan's tax cuts was quite small. Indeed, the first round of tax cuts when the economy grew the fastest left the top rate at 50%, much higher than the 35% of today.

Second, Reagan devotees never tire of repeating the "longest peacetime expansion in U.S. history" line, despite the face that it simply isn't true. The Reagan expansion lasted 32 quarters from the Q4 1982 through Q3 1990. Pretty good, eh? Well, not as good as the 40 quarters of expansion from Q2 1991-Q4 2000 that began during the Bush I administration and continued throughout all of the Clinton years. Moreover, the Clinton expansion saw better job growth than the Reagan years (23 million jobs vs. 16 million jobs) and much better budget results, with Clinton leaving a substantial surplus and Reagan leaving a substantial deficit. Lastly, the Clinton economic performance occurred after two increases in the top marginal income tax rates, first in 1990 under Bush I (28% to 31%) and then again under Clinton in 1993 (31% to 39.5%). How Reagan's economic policy was responsible for economic growth during the Clinton administration is not explained. One might just as well argue that the economic policies of LBJ were responsible for all the good that occurred during the Reagan years.

In any case, comparing the Obama stimulus to the initial Reagan tax cut is a particularly pointless exercise, since the economic conditions that preceded them were wildly different. Reagan dealt with high inflation and high interest rates, but the Obama stimulus was passed during a deflationary period when interest rates were near zero.

Kengor feels it necessary to respond to the "myth" that Reagan's tax cuts were responsible for the deficit by pointing out "Tax revenues under Reagan rose from $599 billion in 1981 to nearly $1 trillion in 1989. The problem was that outlays all along outpaced revenue, soaring from $678 billion in 1981 to $1.14 trillion in 1989." The $599 billion in 1981 that Kengor cites was 19.6% of GDP that year. The nearly $1 trillion in 1989 he cites was 18.4% of GDP. Ironically, over the same period and using the very data he cites, spending went down as a percentage of GDP from 22.2% to 21.2%. So, even the data he cites demonstrates exactly the opposite of what he claims. Not only is it not a "myth" that the Reagan tax cuts caused the Reagan deficits, his own data proves it.

However, there was another Reagan, the Reagan of foreign policy achievements. In this arena Reagan was much more successful. His Teddy Rooseveltian policy of speaking softly and carrying a big stick was effective in helping to win the Cold War. He did not do this alone, as many Reagan sycophants insist. He had a lot of help from a Polish Pope, a Polish labor leader, and a man by the name of Mikhail Sergeyevich Gorbachev. Had Gorbachev been willing to fire on his own people to prevent change, events in the eastern block would have turned out differently. Nonetheless, Reagan deserves his not insubstantial share of the credit. Unfortunately, it is this aspect of the Reagan administration--the truly successful part--that contemporary Republicans have almost completely forgotten. Be strong, yes, but engage your enemies with relentless negotiation is an approach that the Bush II administration abandoned.

Even on tax policy, Reagan's demonstrable flexibility on the subject--lowering taxes when he could, but raising taxes when necessary--is an anathema to the modern GOP. Too bad.